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ACCT20002 Lecture Notes - Lecture 3: Financial Statement, Impaired Asset, Book Value

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School
University of Melbourne
Department
Accounting
Course
ACCT20002
Professor
Jagjit Kaur

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Attempt and bring the following Questions to your Tutorial
In class Tutorial Question: Topic: PPE & Impairment
Exercise 5.17
Acquisitions, disposals, depreciation
Swan Ltd purchased equipment on 1 July 2018 for $39 800 cash. Transport and
installation costs of $4200 were paid on 5 July 2018. Useful life and residual value were
estimated to be 10 years and $1800 respectively. Swan Ltd depreciates equipment using
the straight-line method to the nearest month, and reports annually on 30 June.
In June 2020, changes in technology caused the company to revise the estimated useful
life from 10 years to 5 years, and the residual value from $1800 to $1200. This revised
estimate was made before recording the depreciation for the reporting period ended 30
June 2020. (Note: as the question states that the revised estimate was made BEFORE
the depreciation was recorded, the depreciation expense must be based on the revised
value of the asset).
(a) On 30 June 2020, the company adopted the revaluation model to account for
equipment. An expert valuation was obtained showing that the equipment had a fair
value of $30 000 at that date.
(b) On 30 June 2021, depreciation for the year was charged and the equipment’s
carrying amount was remeasured to its fair value of $16 000.
(c) On 30 September 2021, the equipment was sold for $8400 cash.
Required
1. Prepare general journal entries to record depreciation of the equipment for the
years ended 30 June 2019 and 2020.
2. Prepare general journal entries to record the transactions and events for the period
1 July 2019 to 30 September 2021 for items (i) to (iii). (Narrations are not required.)
(Show all workings and round amounts to the nearest dollar.)
(LO5, LO6 and LO7)
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1.
Date
Details
Dr
Cr
2019
30 June
Depreciation – Equipment
4 220
Accumulated depreciation - Equipment
4 220
([$44 000 – $1 800]/10 = $4 220)
2020
30 June
Depreciation – Equipment
9 645
Accumulated depreciation – Equipment
9 645
([$44 000 – $4 220 - $1 200]/4 = $9 645 )
2.
2020
30 June
Accumulated depreciation – Equipment
13 865
Equipment
(Write down to carrying amount)
13 865
Loss on revaluation of equipment (P&L)
135
Equipment
(Fair value $30 000; Carrying amount $30 135;
Revaluation decrease $135)
135
2021
30 June
Depreciation – Equipment
9 600
Accumulated depreciation – Equipment
9 600
([$30 000 – $1 200]/3 = $9 600)
Accumulated depreciation – Equipment
9 600
Equipment
9 600
(Write down to carrying amount)
Loss on revaluation of plant (P&L)
Equipment
(Fair value $16 000; Carrying amount $20 400;
Revaluation decrease $4 440)
4 400
4 400
30 Sept
Depreciation expense – Equipment
1 850
Accumulated depreciation - Equipment
1 850
(3/12[$16 000 – $1 200/2] = $1 850)
Accumulated depreciation – Equipment
1 850
Carrying amount of Equipment
14 150
Equipment
16 000
Cash
8 400
Proceeds on sale – Equipment
8 400
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Document Summary

Attempt and bring the following questions to your tutorial. In class tutorial question: topic: ppe & impairment. Swan ltd purchased equipment on 1 july 2018 for 800 cash. Transport and installation costs of were paid on 5 july 2018. Useful life and residual value were estimated to be 10 years and respectively. Swan ltd depreciates equipment using the straight-line method to the nearest month, and reports annually on 30 june. In june 2020, changes in technology caused the company to revise the estimated useful life from 10 years to 5 years, and the residual value from to . This revised estimate was made before recording the depreciation for the reporting period ended 30. Required: prepare general journal entries to record depreciation of the equipment for the years ended 30 june 2019 and 2020, prepare general journal entries to record the transactions and events for the period.

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Related Questions

Revaluation of property, plant and equipment You are theaccountant for Superstar Ltd, and you are required to account forthe company’s equipment for the years ended 30 June 2017 and 30June 2018, which are measured using the revaluation model. Thedirectors elect to depreciate equipment on a straight-line basis.Equipment 1: The first equipment has a carrying amount as follows,prior to any depreciation or revaluation being recognised for theyear ended 30 June 2017: Revalued amount (as at 30 June 2016):$60,000 Less: accumulated depreciation - Carrying amount $60,000This equipment was revalued for the first time on 30 June 2016,from $70,000 to $60,000. The directors determined that as at 30June 2016, this equipment had an estimated remaining useful life of4 years, and an estimated residual value of $10,000. The directorshave determined that the fair value of this equipment on 30 June2017 is $55,000. At 30 June 2017, this equipment had an estimatedremaining useful life of 3 years, and the residual value remainsunchanged at $10,000. The directors have determined that the fairvalue of this equipment on 30 June 2018 is $44,000. Equipment 2:The second equipment at has a carrying amount as follows, prior toany depreciation or revaluation being recognised for the year ended30 June 2017: Revalued amount (as at 30 June 2016): $20,000 Less:accumulated depreciation - Carrying amount $20,000 This equipmenthas been revalued a number of times, with revaluation decrementsamounting to $1,000 being previously recognised in profit or loss.The directors determined that as at 30 June 2016, this equipmenthad an estimated remaining useful life of 4 years, and an estimatedresidual value of $4,000. The directors have determined that thefair value of this equipment on 30 June 2017 is $18,000. At 30 June2017, this equipment had an estimated remaining useful life of 3years, and the residual value has been revised to $6,000. Thisequipment is sold on 31 December 2017 for $13,000. Required:Prepare the necessary journal entries to account for each of theabove equipment for the years ended 30 June 2017 and 30 June 2018(including entries for depreciation, revaluations, and anydisposals). Show all relevant workings. Note: you are not requiredto account for income tax associated with revaluations. MarkingGuide - Question 4 Max. marks awarded Journal entries 12 Workings4

Financial statement disclosures You are the financial accountantfor Superstore Ltd, and are in the process of preparing itsfinancial statements for the year ended 30 June 2018. Whilstpreparing the financial statements, you become aware of thefollowing situations:

On 1 July 2017, the directors made a decision, using informationobtained over the last couple of years, to revise the useful lifeof an item of manufacturing equipment. The equipment was acquiredon 1 July 2015 for $800,000, and has been depreciated on astraight-line basis, based on an estimated useful life of 10 yearsand residual value of nil. Superstore Ltd uses the cost model formanufacturing equipment. The directors estimate that as at 1 July2017, the equipment has a remaining useful life of 6 years and aresidual value of nil. No depreciation has been recorded as yet forthe year ended 30 June 2018 as the directors were unsure how toaccount for the change in the 2018 financial statements, and unsurewhether the 2016 and 2017 financial statements will need to berevised as a result of the change.

In June 2018, the accounts payable officer discovered that aninvoice for repairs to equipment, with an amount due of $20,000,incurred in June 2017, had not been paid or provided for in the2017 financial statements. The invoice was paid on 12 July 2018.The repairs are deductible for tax purposes. The accountantresponsible for preparing the company’s income tax returns willamend the 2017 tax return, and the company will receive a taxrefund of $6,000 as a result (30% x $20,000). No journal entrieshave been done as yet in the accounting records of Superstore Ltd,as the directors are unsure how to account for this situation, andwhat period adjustments need to be made in.

Superstore Ltd holds shares in a listed public company, ABC Ltd,which are valued in the draft financial statements on 30 June 2018at their market value on that date - $600,000. A major fall in thestock market occurred on 10 July 2018, and the value ofSuperstore’s shares in ABC Ltd declined to $250,000.

On 21 July 2018, you discovered a cheque dated 20 April 2018 of$32,000 authorised by the company’s previous accountant, Max. Thepayment was for the purchase of a swimming pool at Max’s house. Thepayment had been recorded in the accounting system as anadvertising expense. You advise the directors of this fraudulentactivity, and they will investigate.

Assume that each event is material. Required:

i) State the appropriate accounting treatment for eachsituation. Provide explanations and references to relevantparagraphs in the accounting standards to support your answers.Where adjustments to Superstore Ltd’s financial statements arerequired, explain which financial statements need to be adjusted(ie. 2016, 2017, 2018 or 2019).

ii) Prepare any note disclosures and adjusting journal entriesthat are needed in the 2018 financial statements for eachsituation.

Carla Ltd. purchased a building on January 1, 2015 for $14,860,000. Carla accounted for this asset using the revaluation model, and revalued the building every two years. The building was estimated to have a useful life of 30 years with no residual value, and Carla used straight-line depreciation. On December 31, 2016, the building had a fair value of $14,059,334. On December 31, 2018, the building had a fair value of $12,779,600. Prepare the journal entries on the books of Carla Ltd. to revalue the building on December 31, 2016 and December 31, 2018 using the asset adjustment method.