Wasting Assets AK PDF

Preview

Summary

Wasting AssetLet’s CheckProblem 1 Faith Company was engaged in the rock and gravel business. The following transactions relate to the acquisition and development of an extensive gravel pit: Year 1 Cost of acquisition and development 3,456, Estimated output 2,400,000 tons Production 1,000,000 tons Ye...

Description

Wasting Asset Let’s Check Problem 1 Faith Company was engaged in the rock and gravel business. The following transactions relate to the acquisition and development of an extensive gravel pit: Year 1 Cost of acquisition and development 3,456,000 Estimated output 2,400,000 tons Production 1,000,000 tons Year 2 Additional development cost 1,764,000 Production 600,000 tons Year 3 Additional development cost 600,000 New estimate of remaining output 2,500,000 tons Production 700,000 tons Required: Prepare journal entries for year 1, year 2 and year 3. Answer: 2017 3,456,000/2,400,000=1.44*1,000,000 = 1,440,000 Rock and Gravel 3,456,000 Cash 3,456,000 Depletion 1,440,000 Accumulated Depletion 2018

Rock and Gravel Cash

1,440,000

1,764,000 1,764,000

Depletion 1,620,000 Accumulated depletion 1,620,000

2019

Rock and gravel Cash

600,000 600,000

Depletion 772,800 Accumulated Depletion 772,800

3,456,000+1764000-1,440,000 = 3,780,000/1400,000 =2.7*600,000 =1,620,000

3456,000+1754,000+600,000 = 5,820,000-1440000-1,620,000 = 2,760,000/2,500,000 = 1.104

Problem 2 Alpas company purchased a natural resource property for 9,000,000. The estimated output was 1,500,000 tons. Mining equipment was acquired at the cost of 14,400,000. The equipment has a useful life of 10 years but is capable of exhausting the resource in six to eight years. Production is as follows: 1st year 300,000 tons Second year 375,000 tons 3rd year None 4th year 150,000 Compute the depletion and depreciation for each of the 4 years. Answer: 14,400,000/1,500,000 = 9.6 Depletion Year 1 9,000,000/1,500,000= 6*300,000=1,800,000

Depreciation 9.6*300,000=2,880,000

Year 2 9,000,000/1500,000*375,000=2,250,000 Year 3 = -

9.6*375,000=3,600,000 14400,000 - 2,880,000 - 3,600,000 =7,920,000/8=990,000

Year 4 9,000,000/1500,000*150,000=900,000

1,500,000-675,000=825,000 14,400,000-2880,000-3600,000— 990,000=6,930,000/825,000 = 8.4*150,000=1,260,000

Let’s Analyze Exercise 1.On January 1, year 1, Kirk Company was organized with an authorized share capital of 18,750,000 consisting of 75,000 of P250 par value, one half of which was immediately sold for cash at 275 per share. In February, the entity acquired a tract of resource land at a cost of 5,625,000 which was paid in cash. Also, the entity purchased for cash mining equipment of 1,500,000. The geological survey of the resource property indicated an estimated content of 1,000,000 units. During the year ended December 31 2017, the entity mined 90,000 units of which 85,000 units were sold for a cash price of 125 per unit. The entity paid the following during the year. Mining labor and other direct costs Administrative expenses

4,252,500 937,500

Required: a. Prepare journal entries including adjustments to record the transactions. b. Prepare an income statement for the year ended December 31, year 1. c. Prepare a statement of financial position on December 31, year 1. d. Compute the maximum dividend that can legally be declared by the entity on December 31, year 1. e. Prepare journal entry assuming the maximum dividend is declared by the entity.

Answer: Jan. 1, year 1

Feb. year 1

Cash 10,312,500 Share Capital 9,375,000 Share premium 937,500 Resource property Cash

5,625,000 5,625,000

Mining Equipment Cash

1,500,000 1,500,000

Cash 10,625,000 Sales 10,625,000 Depletion 506,250 Accumulated depletion 506,250 5625,000/1,000,000=5.625*90,000=506,250 Mining labor & Other Costs Administrative expenses Cash

4,252,500 937,500 5,190,000

Inventory 271,875 P/L 271,875 Depreciation 1500,000/1000000*90,000 Accumulated Depreciation

135,000 135T

4252,500/90,000 = 47.25 1500,000/1000000=1.5 5625,000/1000000=5.625 54.375*5,000 =271,875 B. Income statement Sales Less: 135,000 937,500 4,252,500 506,250 (271,875) Net Income

10,625,000

(5,559,375) 5,065,625

C. Statement of financial position CA: Cash 8,622,500 Inventory 271,875 8,894,375 NCA:Resource Property 5,625,000 Less: A/D (506,250) Mining Property 1,500,000 Less: A/D (135,000) 6,483,750

15,378,125

Total Assets Share Capital Share premium R/E

9,375,000 937,500 5,065,625 15,378,125

D. RE 5,065,625 Cap. Liquidated 506,250 Dividends payable 5,571,875 In a Nutshell Your boyfriend seeks for your expertise regarding a work related matter. He works for Love company engaged in a business on exploration of natural resource property. He provided you with the following balances at the end of the current year: Wasting asset, at cost 16,000,000 Accumulated depletion 2,000,000 Share capital 40,000,000 Capital liquidated 1,440,000 Retained earnings 1,200,000 Depletion based on 50,000 units at 16 per unit 800,000 Inventory of resource deposit (5000 units) 320,000 He is confused on the company’s declaration of dividends of 1,600,000 which is more than its retained earnings balance. Answer 2,000,000

+

1,200,000

=

3,200,000

=

1,760,000

-

1,440,000

(80,000) =

1,680,000 Max Dividend...