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Ch05 topic 2 - Practice questions for chapter 5
Company Accounting (ACC20013)
Swinburne University of Technology
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Solutions Manual t/a Financial Accounting 9e by Craig Deegan Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd
PART 3: ACCOUNTING FOR ASSETS
Solutions to Chapter 5 Depreciation of property, plant and equipment
Challenging questions
5 At issue in this question is how to treat the replacement roof and the expected demolition costs. The general rule is that if we repair an asset to its former state then the repair is treated as an expense when incurred. However, if the asset has some work done to it which extends its useful life then such expenditure can be capitalised. In this question we will capitalise the roof repairs given that the work extended the life of the building such that it would last for 25 years from the end of the 2022 financial year. The work undertaken represented an improvement. In relation to the expected demolition costs, paragraph 16 of AASB 116 states: The cost of an item of property, plant and equipment comprises: (a) its purchase price, including import duties and non-refundable purchase taxes, after deducting trade discounts and rebates; (b) any costs directly attributable to bringing the asset to the location and condition necessary for it to be capable of operating in the manner intended by management; and (c) the initial estimate of the costs of dismantling and removing the item and restoring the site on which it is located, the obligation for which an entity incurs either when the item is acquired or as a consequence of having used the item during a particular period for purposes other than to produce inventories during that period.
Therefore, in determining depreciation expense, we need to include the cost of the future demolition in our calculations. Original cost in 2018 (assuming completed at the beginning of 2010 financial year) $960 000 Expected residual $nil Expected demolition cost $100 000 Depreciable base $1 060 000 Depreciation per year given expected life of 25 years $42 400
Solutions Manual t/a Financial Accounting 9e by Craig Deegan - Carrying amount at 30 June 2022 (with five years accumulated depreciation) $848 Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd - New roof $200 - Revised depreciable base as at 1 July 2022 $1 - Depreciation per year with remaining life of 25 years $41 - Hence, depreciation expenses for 2021, 2022 and 2023 are $42 400, $41 920 and $41
- 5 Original cost 1 July 2020 $3 respectively.
- Depreciation year ending 30 June 2021 [$3 660 000 × 3000/10 000] $1
- Carrying amount 30 June 2021 $2
- Major upgrade undertaken on 1 July 2021 $234
- Carrying amount at 1 July 2021 $2
- Depreciation year ending 30 June 2022 [$2 796 600 × 4000/9000] $1
- Carrying amount 1 July 2022 $1
- Major upgrade undertaken on 1 July 2022 $344
- Carrying amount 1 July 2022 $1
- Depreciation year ending 30 June 2023 [$1 898 567 × 3800/8100] $890
- Carrying amount 30 June 2023 $1
- 1 July
- Dr Plant $3
- Cr Cash/payables
- 30 June (to account for the acquisition of the plant)
- Dr Depreciation expense
- Cr Accumulated depreciation—plant
- Major upgrade undertaken on 1 July 2021 $234
Solutions Manual t/a Financial Accounting 9e by Craig Deegan Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd
Year 3 if kept 120 000 25% 30 000 30 000 Year 4 if kept 120 000 25% 30 000 0
30.6 Dr Depreciation expense $30 000 Cr Accumulated depreciation $30 000 (Recognition of depreciation expense)
30.6 Dr Depreciation expense $30 000 Cr Accumulated depreciation $30 000 (Recognition of depreciation expense)
01.07 Dr Accumulated depreciation $60 000 Dr Loss on disposal $10 000 Dr Bank $50 000 Cr Printing machine $120 000 (Recognition of sale of printing machine)
(b) Decl-balance Open CA Dep’n rate Dep’n Carrying amt Year 1 120 000 40% 48 000 72 000 Year 2 72 000 40% 28 800 43 200 Year 3 if kept 43 200 40% 17 280 25 920 Year 4 if kept 25 920 remainder 25 920 0
30.6 Dr Depreciation expense $48 000 Cr Accumulated depreciation $48 000 (Recognition of depreciation expense)
30.6 Dr Depreciation expense $28 800 Cr Accumulated depreciation $28 800 (Recognition of depreciation expense)
01.07 Dr Dr
Accumulated depreciation Bank
$76 800
$50 000
Cr Printing machine $120 000
Solutions Manual t/a Financial Accounting 9e by Craig Deegan Copyright © 2020 McGraw-Hill Education (Australia) Pty Ltd
Cr Gain on disposal $6 800 (Recognition of sale of printing machine)
(c) SOYD Cost Dep’n rate Dep’n Carrying amt Year 1 120 000 0 48 000 72 000 Year 2 120 000 0 36 000 36 000 Year 3 if kept 120 000 0 24 000 12 000 Year 4 if kept 120 000 0 12 000 0
30.6 Dr Depreciation expense $48 000 Cr Accumulated depreciation $48 000 (Recognition of depreciation expense)
30.6 Dr Depreciation expense $36 000 Cr Accumulated depreciation $36 000 (Recognition of depreciation expense)
01.07 Dr Dr
Accumulated depreciation Bank
$84 000
$50 000
Cr Printing machine $120 000 Cr Gain on disposal $14 000 (Recognition of sale of printing machine)
(d) Production Cost Hours Dep’n Carrying amt Year 1 120 000 3000 30 000 90 000 Year 2 120 000 3400 34 000 56 000
30.6 Dr Depreciation expense $30 000 Cr Accumulated depreciation $30 000 (Recognition of depreciation expense)
30.6 Dr Depreciation expense $34 000 Cr Accumulated depreciation $34 000
Ch05 topic 2 - Practice questions for chapter 5
Course: Company Accounting (ACC20013)
University: Swinburne University of Technology
