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ACC102 Fundamentals Of Accounting
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ACC102 Fundamentals Of Accounting
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Course Code: ACC102
University: Trident University International
MyAssignmentHelp.com is not sponsored or endorsed by this college or university
Country: United States
Question:
On 1 January 2017, Nicolaidis Ltd purchased two identical new machines at a total cost of $700 000 plus GST. It was estimated that the machines would have a useful life of 10 years and a residual value of $50 000 each. Nicolaidis Ltd uses the straight-line method of depreciation for all of its equipment. The company’s end of reporting period is 31 December.
Required
(a)Record the purchase of the trucks on 1 January 2017.
(b)Record the depreciation expense on the trucks for 2022.
(c)Assume that early in 2023 the company revalued the machines upwards by $80 000 each and assessed that the machines would last 6 more years instead of 4 but that the residual value would be $80 000. Record all journal entries for the trucks in 2023.
(d)Make the necessary entries to record the sale of one of the machines on 31 December 2023. The machine was sold for $200 000 plus GST. (Assume that the two machines had the same carrying amount, which equalled their fair values at this date.)
(e)How much depreciation expense would be recorded on the second machine during 2025 if it were still being used and if its residual value were still $50 000? Why?
Tamworth Trading Ltd uses the perpetual inventory system, and all purchases and sales are on credit. Selling price is $5 per unit. GST is 10% and is not included in any of the costs and selling prices above. A stocktake on 30 June revealed 5150 units in inventory. Ignore GST.
Required
(a)Using the FIFO method, prepare appropriate purchases and sales journals to record these events.
(b)Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Tamworth Trading Ltd).
(c)Prepare an income statement for Tamworth Trading Ltd for June.
Answer:
Case study one
Part (a)
The purchase price consists of the amount paid by the seller for acquiring the asset. All the direct cost associated with buying the asset also makes part of the purchase cost. In this case, Nicolaidis purchased the two machines at a cost $700000 which includes GST. Since the GST is directly related with the purchasing the asset therefore purchase is recorded on 1 January 2017 by the amount of $ 700000
Part (b)
In this study, it has been given that the Nicolaidis used the straight-line method for the depreciation. The amount of depreciation will be calculated by applying the straight-line method will be (purchase cost-residual value) divided by the useful life of the asset (Del Giudice, Manganelli, and De Paola, 2016). In this case, the cost of acquiring the two machine was $ 700000. Therefore the purchase price per machine was $ 350000 (700000/2), and the useful life of the asset is given in the question is 10 years along with the residual value is $ 50000 for each machine.
The amount of depreciation per machine= (350000-50000)/10= $ 30000 per machine
By straight line method amount of depreciation remains the same for the entire period of the asset (Küpper, and Pedell, 2016). Therefore depreciation expense for the year 2022 will be $ 30000 per machine, and for the two machines, it will be $ 60000.
Part (c)
Journal Entries in the year 2023
For the upwards revaluation
Particulars
Debit
Credit
Truck A/C Dr
To Revaluation Surplus
$ 160000
$160000
Depreciation on the truck after revaluation
Particulars
Debit
Credit
Depreciation Dr
To Truck
$ 70000
$70000
Working Note
year
Depreciation
Price at the end of year
2017
30000
320000
2018
30000
290000
2019
30000
260000
2020
30000
230000
2021
30000
200000
2022
30000
170000
2023
30000
140000
2024
30000
110000
2025
30000
80000
2026
30000
50000
From the above table, it has been seen that the value of each truck at the end of 2022 is $ 170000, for the two trucks it was $ 340000. The trucks were revalued upward at the beginning of 2023 by $ 80000 each. Total revaluation for both the machine was $ 160000. The revised price of an asset is $ 340000+$160000 that is 500000; however, the residual value would be $ 80000 and the revised life of the asset 6 years.
Therefore the depreciation (500000-80000)/6= $70000 for both machines
It has been assumed that the residual value given in the question was for both the machines.
Transfer of the depreciation in the income statement
Particulars
Debit
Credit
Profit and loss A/C Dr
To Depreciation
$ 70000
$70000
Part (d)
At the end of the year 2023, the carrying amount of the truck will be
($500000-$70000) that is $430000 for both the truck. Therefore the carrying amount for the one truck $215000. This machine was sold for $ 200000 plus GST.
Journal entries at the end of 2023 for selling the machinery
Cash received by selling of Truck
Particulars
Debit
Credit
Cash A/C Dr
To Truck
$ 200000
$200000
Loss on sale of an asset
Particulars
Debit
Credit
Loss on sale of Asset Dr
To Truck
$ 15000
$15000
Loss transfer to income statement
Particulars
Debit
Credit
Profit and loss account Dr
To Loss on sale of Asset
$ 15000
$15000
Part (e)
The carrying value of the truck at the beginning of the year 2025
year
Depreciation
Price at the end of year
Revaluation
Revised value
Revised useful life
Revised depreciation
revised price at the year end
2017
30000
320000
2018
30000
290000
2019
30000
260000
2020
30000
230000
2021
30000
200000
2022
30000
170000
80000
250000
250000
2023
30000
140000
2023
35000
215000
2024
30000
110000
2024
35000
180000
2025
30000
80000
2025
2026
30000
50000
2026
2027
2028
From the above table, it has been seen that the carrying value of the truck at the beginning of the year 2025 is $ 180000. If the residual value is $ 50000, then the depreciation will be recorded at (180000-50000)/4 that is $ 32500. Since the remaining useful life of truck from the year, 2025 was 4 years.
Case study two
Part (a)
Purchase Journal
Date
Account Credited
Amount
4-June
Creditor
10350 (4600*2.25)
12-June
Creditor
9840 (4100*2.4)
26-June
Creditor
7750 (3100*2.5)
Sales Journal
Date
Account Debited
Amount
9-June
Debtor
20500 (4100*5)
21-June
Debtor
15500(3100*5)
24-June
Debtor
14500(2900*5)
30-June
Debtor
13000(2600*5)
Part (b)
There are various methods for determining the value of the inventory such as First-in-First out, Last-in-first Out or the weighted average method. In the FIFO method, it is assumed that the goods which are purchased by the entity first will be sold in chronological order which means first previous goods will be sold (Simeon, and John, 2018). This method is also accepted under the generally accepted accounting principles. Moreover, this method also assists in decreasing the risk of obsolesce by the selling of the oldest goods first (Ionescu, Toma, and Founanou, 2018).
Date
Opening (Units)
Purchase
Sale
Balance In Unit
Amount ($)
Cumulative Amount
01-Jun
6100 units @ 2.2
6100
13420
13420
04-Jun
6100 units @ 2.2
4600 unit @ 2.25
10700
10350
23770
09-Jun
6100 units @ 2.2 and 4600 unit @ 2.25
4100 Units @ 2.2
6600
9020
14750
12-Jun
2000 units @ 2.2 and 4600 units @ 2.25
4100 Units @ 2.4
10700
9840
24590
21-Jun
2000 units @ 2.2 and 4600 units @ 2.25 and 4100 units @ 2.4
2000 units @ 2.2 and 1100 units@ 2.25
7600
6875
17715
24-Jun
3500 units @ 2.25 and 4100 units @ 2.4
2900 units @ 2.25
4700
6525
11190
26-Jun
600 units @ 2.25 and 4100 units @ 2.4
3100 units @ 2.5
7800
7750
18940
30-Jun
600 units @ 2.25 and 4100 units @ 2.4 and 3100 units @ 2.5
600 units @ 2.25 and 2000 units @ 2.4
5200
6150
12790
Part (c)
Income statement
Particulars
Amount
Particulars
Amount
To Opening Stock
13420
By Sales
63500
To Purchase
27940
By Closing Stock
12790
To Gross Profit
34930
Total
76290
76290
Case study three
1. Depreciation by the straight line method
($1320000- $100000)/10
=$122000
Carrying amount at the end of each year up to five year
Year
Annual Depreciation
Accumulated depreciation
Carrying amount at the end of year
2020
122000
122000
1198000
2021
122000
244000
1076000
2022
122000
366000
954000
2023
122000
488000
832000
2024
122000
610000
710000
2. Depreciation by Diminishing balance method
For calculation of the depreciation by diminishing balance method the rate of the diminishing required.
Rate of depreciation= 1 – (Scrap / Cost of Machine) 1/Years
=1 – ($100000 / $1320000)1/10
=23%
Year
Annual Depreciation
Accumulated depreciation
Carrying amount at the end of year
2020
303600
303600
1016400
2021
233772
537372
782628
2022
180004.4
717376.4
602623.6
2023
138603.4
855979.9
464020.1
2024
106724.6
962704.5
357295.5
3. Deprecation by the sum of year digit method
Calculation of the sum of year digit= 10+9+8+7+6+5+4+3+2+1
=55
Calculation of the depreciable amount= ($1320000-$100000)
=$1220000
Calculation of un depreciable useful life
2020
10
2021
9
2022
8
2023
7
2021
6
Calculation of the Depreciation = Depreciable amount* un depreciable useful life/Sum of year digit
Year
Annual Depreciation
Accumulated depreciation
Carrying amount at the end of year
2020
221818.2
221818.2
1098182
2021
199636.4
421454.5
898545.5
2022
177454.5
598909.1
721090.9
2023
155272.7
754181.8
565818.2
2024
133090.9
887272.7
432727.3
4. Depreciation by units of production
Cost of the Machine= $ 1320000
The salvage value of the Machine= $100000
Expected production= 500000
The depreciable cost of the machine under the unit of production method= ($1320000-$100000)/500000= 2.24 per unit
On each year depreciation will be allocated on the basis of the actual output
Year
Actual output
Annual Depreciation
Accumulated depreciation
Carrying amount at the end of year
2020
50000
112000
112000
1208000
2021
45000
100800
212800
1107200
2022
55000
123200
336000
984000
2023
58000
129920
465920
854080
2024
60000
134400
600320
719680
References
Del Giudice, V., Manganelli, B. and De Paola, P., (2016). Depreciation methods for firm’s assets. In International Conference on Computational Science and Its Applications(pp. 214-227). Springer, Cham.
Ionescu, L., Toma, M. and Founanou, M., (2018). Applied Analysis of the Impact of Inventory Valuation Methods on the Financial Situation and Financial Performance. Valahian Journal of Economic Studies, 1(ahead-of-print).
Küpper, H.U. and Pedell, B., (2016). Which asset valuation and depreciation method should be used for regulated utilities? An analytical and simulation-based comparison. Utilities Policy, 40, pp.88-103.
Simeon, E.D. and John, O., (2018). The implication of Choice of Inventory Valuation Methods on Profit, Tax and Closing Inventory. Account and Financial Management Journal, 3(07), pp.1639-1645.
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