ACT B811 – Tutorial 4 – Tutorial questions and solution

Q.1 The following information is related to Rommel Company.

a) On July 6, Rommel acquired the plant assets of Studebaker SE, which had
discontinued operations. The appraised value of the property is:

Land €400,000
Building 1,200,000
Machinery 800,000
Total €2,400,000

Rommel Company gave 12,500 ordinary shares in exchange. The shares had a market
price of €180 per share on the date of the purchase of the property.

b) Rommel Company expended the following amounts in cash between July 6 and
December 15, the date when it first occupied the building.

Repairs to building €105,000

Construction of bases for machinery to be installed later 135,000
Driveways and car park 122,000
Remodeling of office space in building, including new partitions and walls 161,000
Special assessment by city on land 18,000

c) On December 20, the company paid cash for machinery, €280,000, subject to a 2%
cash discount, and freight on machinery of €10,500.

Required: Prepare entries on the books of Rommel Company for these transactions.

Q.1 – Solution

a)

The cost of the land, building and machinery is €2,250,000 (12,500 X €180). This cost is
allocated based on appraised values as follows:

€400,000
Land X €2,250,000 = €375,000
€2,400,000
€1,200,000
Building X €2,250,000 = €1,125,000
€2,400,000
€800,000
Machinery X €2,250,000 = €750,000
€2,400,000

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€ €
Land 375,000
Building 1,125,000
Machinery 750,000
Share Capital—Ordinary
(12,500 X €180) 2,250,000

b)
€ €
Building (€105,000 plus €161,000) 266,000
Machinery 135,000
Land improvements (driveways and carpark) 122,000
Land 18,000
Cash 541,000

c)
€ €
Machinery
Cash

€ €
Machinery 284,900
Cash 284,900
(€10,500 + 274,400 = €284,900)
€280,000 x 0.98 = €274,400

Q.2

The purchases of non-current assets below are all relevant to Schlegel Ltd which is a family
business run by two sisters. The operating cycle of the company runs from 1st January to 31st
December every year:

(a) Schlegel Ltd has just bought a new packaging machine for $28,000. This should last for
5 years by which time it is estimated that the machine will be worth $3,000. Calculate
the annual depreciation charge. Assume that the straight line method is used.
(b) Meanwhile, the company also purchased the following assets:

Vehicle Purchase Original Estimated useful Estimated

Date Cost life (in Years) Residual Value
st
Saloon 1 January $8,000 4 $2,000
20X4
Estate 1st July 20X4 $10,000 10 $500

What is the deprecation charge on these vehicles for the year ended 31st December 20X4?
Assume that the straight line method is used.

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(c) The following purchases also took place:

Vehicle Purchase Original Estimate useful Estimated

Date Cost life (in Years) Residual Value
Van 1st January $9,000 6 $3,000
20X3
st
Truck 1 January $18,000 12 $Nil
20X4

Required:
i. Calculate the total depreciation charge in 20X3 and 20X4. Assume that the straight line
method is used.
ii. Prepare a statement of financial position extract as at 31st December 20X4 (i.e. there is
no need to show a full SFP).

Q.2 – solution

a) ($28,000-$3,000) / 5 = $5,000 (per year)

b) See below –

Vehicle Depreciation (per annum) Depreciation in

20X4

Saloon ($8,000-$2,000) / 4 = $1,500 $1,500

Estate ($10,000-$500) / 10 = $950 x 6/12 $475

Total $1,975

c) See below –

i)

Vehicle(s) Depreciation (per Depreciation Depreciation

annum) Expense (Charged Expense (Charged
to Income to Income
Statement) – 20X3 Statement) – 20X4
Depreciation ($9,000-$3,000) / 6 $1,000 -
in 20X3 – Van = $1,000
Only

Depreciation ($9,000-$3,000) / 6 - $1,000

in 20X4 – Van = $1,000

Depreciation $18,000 / 12 - $1,500

in 20X4 –
Truck

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Total $1,000 $2,500

ii) Statement of financial position (extract) as at 31st December 20X4

Non-Current Cost Accumulated Depreciation Net Book Value (NBV)

Assets
Van $9,000 $2,000 $7,000
Truck $18,000 $1,500 $16,500

Note: Van’s accumulated depreciation includes depreciation from a previous year (it was
purchased on 1st January 20X3). That is, $1,000 for 2013 and $1,000 for 20X4.

Note: accumulated depreciation and depreciation expense are two different matters, strictly
speaking.

Q.3

On December 31, 2019, Mitsui Ltd. has a machine with a book value of ¥940,000. The
original cost and related accumulated depreciation at this date are as follows:

Machine ¥1,300,000
Less: Accumulated depreciation 360,000
Book value ¥940,000

Depreciation is computed at ¥72,000 per year on a straight-line basis.

Required: Presented below is a set of independent situations. For each independent

situation, indicate the journal entry to be made to record the transaction. Make sure that
depreciation entries are made to update the book value of the machine prior to its disposal.

a) A fire completely destroys the machine on August 31, 2020. An insurance

settlement of ¥630,000 was received for this casualty. Assume the settlement was
received immediately.
b) On April 1, 2020, Mitsui sold the machine for ¥1,040,000 to Avanti Company.
c) On July 31, 2020, the company donated this machine to the Mountain King City
Council. The fair value of the machine at the time of the donation was estimated
to be ¥1,100,000.

Q.3 – Solution
a)
¥ ¥
Depr’n expense of machine (2020) (8/12 x 72,000) 48,000
Accumulated depr’n (2020) - machinery 48,000

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Loss on disposal of machinery 262,000

Cash 630,000
Accumulated depr’n – machinery 408,000
Machinery 1,300,000
360,000 + 48,000 = 408,000 (total accumulated depr’n)
(1,300,000 – 408,000) = 892,000
892,000 – 630,000 = 262,000
b)
¥ ¥
Depr’n expense of machine (2020) (3/12 x 72,000) 18,000
Accumulated depr’n (2020) - machinery 18,000

Cash 1,040,000
Accumulated depr’n – machinery (360,000 + 18,000) 378,000
Machinery 1,300,000
Gain on disposal of machinery 118,000
(1,300,000 – 378,000) = 922,000
1,040,000 – 922,000 = 118,000
c)
¥ ¥
Depr’n expense of machine (2020) (7/12 x 72,000) 42,000
Accumulated depr’n (2020) - machinery 42,000

Contribution expense (fair value given up) 1,100,000

Accumulated depr’n – machinery (360,000 + 42,000) 402,000
Machinery 1,300,000
Gain on disposal of machinery 202,000
(1,300,000 – 402,000) = 898,000
1,100,000 – 898,000 = 202,000

Q.4

Cho Landscaping began construction of a new plant on December 1, 2019 (all amounts
in thousands). On this date, the company purchased a parcel of land for ¥139,000 in cash.
In addition, it paid ¥2,000 in surveying costs and ¥4,000 for a title insurance policy. An
old dwelling on the premises was demolished at a cost of ¥3,000, with ¥1,000 being
received from the sale of materials.
Architectural plans were also formalized on December 1, 2019, when the architect was
paid ¥30,000. The necessary building permits costing ¥3,000 were obtained from the city
and paid for on December 1 as well. The excavation work began during the first week in
December with payments made to the contractor in 2020 as follows.

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Date of Payment Amount of Payment

March 1 ¥240,000
May 1 330,000
July 1 60,000

The building was completed on July 1, 2020.

To finance construction of this plant, Cho borrowed ¥600,000 from the bank on December
1, 2019. Cho had no other borrowings. The ¥600,000 was a 10-year loan bearing interest
at 8%.

Required: Compute the balance in each of the following accounts at December 31, 2019,
and December 31, 2020. (Round amounts to the nearest 1,000 yen.)

a. Land.
b. Buildings.
c. Interest Expense.

Q.4 – solution

a) balance in the Land account (2019 and 2020)

¥
Purchase price 139,000
Surveying costs 2,000
Title insurance policy 4,000
Demolition costs 3,000
Salvage (1,000)
Total 147,000

Expenditures (2019)
Date ¥ Time weight Weighted avg accum expenditures ¥
1st December 147,000 1/12 12,250
1st December 30,000 1/12 2,500
1st December 3,000 1/12 250
180,000 15,000

2019: Weighted avg accum Interest rate Amount capitalisable

expenditures
¥15,000 8% ¥1,200
Interest charged to interest expense
(¥600,000 x 0.08 x 1/12) – ¥1,200 ¥2,800

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Expenditures (2020)
Date ¥ Time weight Weighted avg accum expenditures ¥
1st January 180,000 6/12 90,000
1st January 1,200* 6/12 600
1st March 240,000 4/12 80,000
1st May 330,000 2/12 55,000
1st July 60,000 0 0
811,200 225,600
* interest capitalised in 2019
139,000 + 2,000 + 4,000 +2,000 + 3,000 + 30,000

2020: Weighted avg accum expenditures Interest rate Amount capitalisable

¥225,600 8% ¥18,048
Interest charged to interest expense
(¥600,000 x 0.08) – ¥18,048 ¥29,952

b) balance in building:

2019 2020
¥30,000 + ¥3,000 + ¥1,200 ¥34,200
¥34,200 + ¥240,000 + ¥330,000 + ¥60,000 + ¥18,048 ¥682,248

d) Balance in interest expense

2019 2020
¥2,800 ¥29,952

Q.5

Laserwords A.Ş is a book distributor that had been operating in its original facility since
1985. The increase in certification programs and continuing education requirements in
several professions has contributed to an annual growth rate of 15% for Laserwords since
2014. Laserwords' original facility became obsolete by early 2019 because of the
increased sales volume and the fact that Laserwords now carries CDs in addition to books.

On June 1, 2019, Laserwords contracted with Black Construction to have a new building
constructed for 4,000,000 on land owned by Laserwords. The payments made by
Laserwords to Black Construction are shown in the schedule below.

Date Amount
July 30, 2019 900,000
January 30, 2020 1,500,000
May 30, 2020 1,600,000
Total payments 4,000,000

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Construction was completed, and the building was ready for occupancy on May 27, 2020.
Laserwords had no new borrowings directly associated with the new building but had the
following debt outstanding at May 31, 2020, the end of its fiscal year:

10%, 5-year note payable of 2,000,000, dated April 1, 2016,

with interest payable annually on April 1.
12%, 10-year bond issue of 3,000,000 sold at par on June 30,
2012, with interest payable annually on June 30.

The new building qualifies for interest capitalization. The effect of capitalizing the interest
on the new building, compared with the effect of expensing the interest, is material.

Required:
a) Compute the weighted-average accumulated expenditures on Laserwords' new
building during the capitalization period (Hint: until end of May 2020)
b) Compute the avoidable interest on Laserwords' new building.
c) Some interest cost of Laserwords Inc. is capitalized for the year ended May 31, 2020.
i. Identify the items relating to interest costs that must be disclosed in Laserwords'
financial statements.
ii. Compute the amount of each of the items that must be disclosed.

Q.5 – solution

a)
Date Amount x Capitalisation = Wgtd avg accu expend.
period
30 July 2019 900,000 10/12 750,000
30 January 2020 1,500,000 4/12 500,000
30 May 2020 1,600,000 0 0
4,000,000 1,250,000

b)
Weighted average accumulated expenditure Interest rate Amount capitalisable
1,250,000 11.20%* 140,000

Loans outstanding during construction period

Principal Actual interest
10% 5-year note 2,000,000 200,000
12% 10-year note 3,000,000 360,000
5,000,000 560,000
Capitalisation rate:
* Capitalisation rate = (Total interest / total principal) x 100%
(560,000/ 5,000,000) x 100% = 11.2%

c)

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Total actual interest cost 560,000

Less: total interest capitalised 140,000
Total interest expensed 420,000

Q.6

Holyfield SA wishes to exchange a machine used in its operations. Holyfield has received
the following offers from other companies in the industry.

1. Dorsett Company offered to exchange a similar machine plus €23,000. (The exchange
has commercial substance for both parties.)

2. Winston Company offered to exchange a similar machine. (The exchange lacks

commercial substance for both parties.)

3. Liston Company offered to exchange a similar machine but wanted €3,000 in addition
to Holyfield's machine. (The exchange has commercial substance for both parties.)

4. In addition, Holyfield contacted Greeley Group, a dealer in machines. To obtain a new

machine, Holyfield must pay €93,000 in addition to trading in its old machine. (The
exchange has commercial substance.)

Holyfield Dorsett Winston Liston Greeley

Machine cost €160,000 €120,000 €152,000 €160,000 €130,000
Accumulated depreciation 60,000 45,000 71,000 75,000 –0–
Fair value 92,000 69,000 92,000 95,000 185,000

Required: For each of the four independent situations, prepare the journal entries to
record the exchange on the books of each company.

Q.6 – solution

1. Dorsett’s offer of exchange:

Holyfield: € €
Cash 23,000
Machinery 69,000
Accumulated depr’n – machinery 60,000
Loss on disposal of machinery 8,000
Machinery 160,000
NBV = 160,000 – 60,000 = 100,000; since FV = 92,000; loss of 8,000
23,000 – 92,000 = 69,000

Dorsett: € €

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Machinery 92,000
Accumulated depr’n – machinery 45,000
Loss on disposal of machinery 6,000
Cash 23,000
Machinery 120,000
NBV = 120,000 – 45,000 = 75,000; since FV (of machine given up) =
69,000; loss of 6,000

2. Winston’s offer of exchange (lacks commercial substance):

Holyfield: € €
Machinery 100,000
Accumulated depr’n – machinery 60,000
Machinery 160,000
NBV = 160,000 – 60,000 = 100,000

Winston: € €
Machinery (92,000 – 11,000) 81,000
Accumulated depr’n – machinery 71,000
Machinery 152,000
NBV = 152,000 – 71,000 = 81,000; FV = 92,000; FV – NBV = 11,000
11,000 = gain (but must be deferred since no commercial substance)

3. Liston’s offer of exchange:

Holyfield: € €
Machinery 95,000
Accumulated depr’n – machinery 60,000
Loss on disposal of machinery 8,000
Machinery 160,000
Cash 3,000
NBV = 160,000 – 60,000 = 100,000; since FV = 92,000; loss of 8,000
92,000 + 3,000 = 95,000

Liston: € €
Machinery 92,000
Accumulated depr’n – machinery 75,000
Cash 3,000
Machinery 160,000
Gain on disposal of machinery 10,000
NBV = 160,000 – 75,000 = 85,000; since FV (of machine given up) =
95,000; Gain of 10,000; the entire gain should be recognised as there is
comm. substance

4. Greeley’s offer of exchange:

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Holyfield: € €
Machinery 185,000
Accumulated depr’n – machinery 60,000
Loss on disposal of machinery 8,000
Machinery 160,000
Cash 93,000
NBV = 160,000 – 60,000 = 100,000;
FV of new machine = 185,000; 185,000 – 100,000 (NBV) = 85,000; but
need to pay 93,000; 93,000 – 85,000 = 8,000 (loss)

Greeley: € €
Cash 93,000
Inventory (FV of asset given up by Holyfield) 92,000
Sales 185,000
Cost of goods sold 130,000
Inventory 130,000

Q.7

Lansbury Ltd purchases equipment on January 1, Year 1, at a cost of £518,000. The

asset is expected to have a service life of 12 years and a residual value of £50,000.

Required:

a. Compute the amount of depreciation for each of years 1 through 3 using the
straight-line depreciation method.
b. Compute the amount of depreciation for each of years 1 through 3 using the sum-
of-the-years'-digits method.
c. Compute the amount of depreciation for each of years 1 through 3 using the
double-declining-balance method. (In performing your calculations, round constant
percentage to the nearest one-hundredth of a point and round answers to the
nearest pound.)

Q.7 – solution

a. (£518,000 – 50,000) / 12 = £39,000

b. Sum of the years digits: [12 x (12+1)] / 2 = 78

Depr’n expense
Year 1’s (£518,000 – 50,000) x 12/78 = £72,000
Year 2’s (£518,000 – 50,000) x 11/78 = £66,000
Year 3’s (£518,000 – 50,000) x 10/78 = £60,000

c. Double declining balance method depr’n rate: (100% / 12) x 2 = 16.67%

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Depr’n expense
Year 1’s £518,000 x 16.67% = £86,351
Year 2’s (£518,000 – 86,351) x 16.67% = £71,956
Year 3’s (£518,000 – 86,351 – 71,956) x 16.67% = £59,961

Q.8
Agazzi Company purchased equipment for $304,000 on October 1, 2019. It is estimated
that the equipment will have a useful life of 8 years and a residual value of $16,000.
Estimated production is 40,000 units, and estimated working hours are 20,000. During
2019, Agazzi uses the equipment for 525 hours, and the equipment produces 1,000 units.

Required: Compute depreciation expense under each of the following methods. Agazzi
is on a calendar-year basis ending December 31. Hint: you may need to pro-rata the
depreciation charges.

a. Straight-line method for 2019.

b. Activity method (units of output) for 2019.
c. Activity method (working hours) for 2019.
d. Sum-of-the-years'-digits method for 2021.
e. Double-declining-balance method for 2020.

Q.8 – solution

a) ($304,000 – 16,000) / 8 = $36,000 (per year); $36,000 x 3/12 = $9,000 (3 months’

depr’n)
b) ($304,000 – 16,000) / 40,000 = $7.20; $7.20 x 1000 units = $7,200
c) ($304,000 – 16,000) / 20,000 = $14.40; $14.40 x 525 hours = $7,560
d) 8 + 7 + 6 + 5 + 4 + 3 + 2 + 1 = 36;

Year 2019 2020 2021

1 8/36 x ($304,000 – 64,000 16,000 (3/12) 48,000 (9/12)
16,000) =
2 7/36 x ($304,000 – 56,000 14,000 (3/12) 42,000
16,000) = (9/12)
3 6/36 x ($304,000 – 48,000 12,000
16,000) = (3/12)
16,000 62,000 54,000

e) Double-declining-balance 2020: [(100% ÷ 8) X 2] = 25%

2019: 25% X $304,000 X 3/12 = $19,000
2020: 25% X ($304,000 – $19,000) = $71,250

Q.9

Goldman SA bought a machine on June 1, 2017, for €31,800, f.o.b. the place of
manufacture. Freight to the point where it was set up was €200, and €500 was expended
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to install it. The machine's useful life was estimated at 10 years, with a residual value of
€2,500. On June 1, 2018, an essential part of the machine is replaced, at a cost of €2,700,
with one designed to reduce the cost of operating the machine. The book value of the
old part is estimated to be €900.

On June 1, 2021, the company buys a new machine of greater capacity for €35,000,
delivered, trading in the old machine which has a fair value and trade-in allowance of
€20,000. To prepare the old machine for removal from the plant cost €75, and
expenditures to install the new one were €1,500. It is estimated that the new machine
has a useful life of 10 years, with a residual value of €4,000 at the end of that time. The
exchange has commercial substance.

Required: Assuming that depreciation is to be computed on the straight-line basis,

compute i) the gain/ loss of the old machine when it is being traded in; ii) the annual
depreciation expense on the new machine that should be provided for the fiscal year
beginning June 1, 2021.

Q.9 – solution

Old machine: 1st June 2017 €

Purchase 31,800
Freight 200
Installation 500
Total 32,500
Annual depr’n charge: (€32,500 – 2,500) / 10 = €3,000

1st June 2018: machine: increase of value of €2,700; also decrease of €900: €32,500 –
900 + 2,700 = €34,300

1st June 2018: Revised annual depr’n charge: (€34,300 – 2,500 – 3,000) / 9 = €3,200

Old machine (sale): 1st June 2021 €

Book value: [€34,300 – 3,000 – (3,200 x 3)] 21,700
Fair value (20,000)
Loss on exchange 1,700
Cost of removal 75
Total loss 1,775

New machine: 1st June 2021 €

Cash paid (€35,000 – 20,000) 15,000
Fair value of old machine 20,000
Installation cost 1,500
Total cost 36,500
Annual depr’n charge: (€36,500 – 4,000) / 10 = €3,250

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Q.10

Morrow Manufacturing has equipment that is comprised of five components (amounts in

thousands).

Estimated
Component Cost Estimated Life (in years)
Residual
A ¥40,500 ¥5,500 10
B 33,600 4,800 9
C 36,000 3,600 8
D 19,000 1,500 7
E 23,500 2,500 6

Required:

a) Prepare the adjusting entry necessary at the end of the year to record depreciation
for the year. Assume that Morrow uses straight-line depreciation.
b) Prepare the entry to record the replacement of component B for cash of ¥40,000.
It was used for 6 years.

Q.10 – solution

a) Estimated Depreciable Estimated Depreciation

Component Cost Residual Cost Life per Year
A ¥ 40,500 ¥ 5,500 ¥ 35,000 10 ¥ 3,500
B 33,600 4,800 28,800 9 3,200
C 36,000 3,600 32,400 8 4,050
D 19,000 1,500 17,500 7 2,500
E 23,500 2,500 21,000 6 3,500
¥152,600 ¥17,900 ¥134,700 ¥16,750

Dr Cr
Depreciation Expense............................................... 16,750
Accumulated Depreciation—Equipment ........ 16,750

(b)
Dr Cr
Equipment .............................................................. 40,000
Accumulated Depreciation—Equipment ................. 19,200*
Loss on Disposal of Equipment .............................. 14,400**

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Equipment .................................................... 33,600

Cash ............................................................ 40,000

*¥3,200 X 6 = ¥19,200
**¥33,600 – ¥19,200 = ¥14,400

Q.11

Pengo Ltd. owns land that it purchased at a cost of ¥400 million in 2017. The company
chooses to use revaluation accounting to account for the land. The land's value fluctuates
as follows (all amounts in thousands as of December 31): 2017, ¥450,000; 2018,
¥360,000; 2019, ¥385,000; 2020, ¥410,000; and 2021, ¥460,000.

Required: Complete the table below.

Other
Accumulated Other
Comprehensive
Value at Comprehensive Income Recognised in Net
Income
December 31 (Accumulated revaluation Income (or Net Profit)
(Revaluation
reserve)
reserve)
2017
2018
2019
2020
2021

Q.11 – solution

Other Comprehensive Accumulated Other

Value at Income Comprehensive Recognised in
December 31 Income Net Income

2017 ¥50,000 ¥50,000 —

2018 (50,000) — (¥40,000)
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2019 — — 25,000
2020 10,000 10,000 15,000
2021 50,000 60,000 —

Q.12 Use the information in Q.11.

Required: Prepare the journal entries to record the revaluation of the land in each year.

Q.12 – solution

December 31, 2017

Land (¥450,000 – ¥400,000) 50,000
Unrealised Gain on Revaluation—Land........................... 50,000

December 31, 2018

Unrealised Gain on Revaluation—Land .................................... 50,000
Loss on Impairment (¥400,000 – ¥360,000).............................. 40,000
Land (¥450,000 – ¥360,000) ........................................... 90,000

December 31, 2019

Land (¥385,000 – ¥360,000) ..................................................... 25,000
Recovery of Impairment Loss .......................................... 25,000

December 31, 2020

Land (¥410,000 – ¥385,000) ..................................................... 25,000
Recovery of Impairment Loss
(¥40,000 – ¥25,000) ..................................................... 15,000
Unrealised Gain on Revaluation—Land........................... 10,000

December 31, 2021

Land (¥460,000 – ¥410,000) ..................................................... 50,000
Unrealised Gain on Revaluation—Land........................... 50,000

Q.13

The following transactions occurred during 2020. Assume that depreciation of 10% per
year is charged on all machinery and 5% per year on buildings, on a straight-line basis,
with no estimated residual value. Depreciation is charged for a full year on all fixed assets

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(i.e. non-current assets) acquired during the year, and no depreciation is charged on fixed
assets disposed of during the year.

A building that cost $112,000 in 2003 is torn down to make room for a new
Jan. 30 building. The wrecking contractor was paid $5,100 and was permitted to keep
all materials salvaged.
Machinery that was purchased in 2013 for $16,000 is sold for $2,900 cash,
Mar. 10
f.o.b. purchaser's plant. Freight of $300 is paid on the sale of this machinery.
A gear breaks on a machine that cost $9,000 in 2015. The gear is replaced at
Mar. 20 a cost of $3,000. The replacement does not extend the useful life of the
machine.
A special base installed for a machine in 2014 when the machine was
purchased has to be replaced at a cost of $5,500 because of defective
May 18 workmanship on the original base. The cost of the machinery was $14,200 in
2014. The cost of the base was $4,000, and this amount was charged to the
Machinery account in 2014.
One of the buildings is repainted at a cost of $6,900. It had not been painted
June 23
since it was constructed in 2016.

Required: Prepare general journal entries for the transactions. (Round to the nearest
dollar.)

Q.13 – Solution

30th January $ $
Building – accumulated depr’n 95,200
Loss on disposal of building 21,900
Building 112,000
Cash 5,100
5% x $112,000 = $5,600; $5,600 x 17 = $95,200
$112,000 – 95,200 = $16,800 (NBV)
$16,800 + $5,100 = $21,900 (loss on disposal)

10th March $ $
Cash ($2,900 – 300) 2,600
Machinery – accumulated depr’n 11,200
Loss on disposal of machinery 2,200
Machinery 16,000
10% x $16,000 = $1,600; $1,600 x 7 = $11,200
$16,000 – 11,200 = $4,800 (NBV)
$4,800 + $300 = $5,100
$5,100 – 2,900 = $2,200 (loss on disposal)

20th March $ $

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Maintenance and repairs expense 3,000

Cash 3,000

18th March $ $
Machinery 5,500
Machinery – accumulated depr’n 2,400
Loss on disposal of machinery 1,600
Machinery 4,000
Cash 5,500
10% x $4,000 = $400; $400 x 6 = $2,400
$4,000 – 2,400 = $1,600 (loss on disposal)

23rd June $ $
Maintenance and repairs expense 6,900
Cash 6,900

Q.14

Lewis and Clark Outdoor Supply Co. incurred the following expenditures in buying a plot
of land on which it plans to build a new factory:

a) The company paid $75,000 cash and assumed a mortgage of $35,000 to buy the
land.
b) The legal fees incurred in buying the land came to $9,750.
c) The cost of tearing down an old building that was standing on the plot of land
was $23,000. However, $4,000 was received from the sale of scraps from the
old building.
d) A carpark was built on the property at a cost of $7,800.

Required: Prepare journal entries to record the above transactions.

Q.14 – Solution

Dr Cr
$ $
a Land 110,000
Cash 75,000
Mortgage payable 35,000

b Land 9,750
Cash 9,750

c Land 19,000
Cash 19,000

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d Land improvement 7,800

Cash 7,800

Q.15

On 4th May 20X0, Brown Ltd bought a track of land as a factory site for $3,000,000. An
existing building on the property was demolished, and construction on the new factory
building began in July 20X0. Cost date are shown below:

$
Construction cost of new building 14,000,000
Cost of demolishing old building 240,000
Proceeds from sale of salvage materials 24,000
Architect’s fees 480,000
Title insurance and legal fees for land purchase 120,000

Required: Compute the capitalised cost of a) the land and b) the completed factory
building.

Q.15 – solution

Land $
Purchase price 3,000,000
Net cost of demolishing old building 216,000
($240,000 - $24,000)
Title insurance and legal fees 120,000
Total cost of the land 3,336,000

The new factory building $

Construction cost 14,000,000
Architect’s fees 480,000
Total cost of the building 14,480,000

Q.16

During 20X0, Castleton Ltd built and produced certain assets, all of which required an
extended period of time for completion. Castleton incurred the following interest costs
in connection with those activities:

Interest costs
incurred
Building constructed for Castleton’s own use $400,000
Inventories routinely produced on a repetitive basis 105,000
Special order machine for sale to unrelated customer, 235,000
made as per customer’s specifications

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Required: Assume that the effect of interest capitalisation is material, state the total
amount of interest costs to be capitalised.

Q.16 – solution

$
Building constructed 400,000
Special order machine produced 235,000
Total 635,000

Q.17

During 20X0 and 20X1, Malone Ltd built a carpark building for its own use. The
expenditures on the construction project, all of which qualify for inclusion in the calculation
of average accumulated expenditure, were a below:

$
2 January 20X0 1,100,000
1 May 20X0 480,000
1 July 20X0 640,000
1 September 20X0 360,000
1 February 20X1 540,000

The project was completed on 31 March 20X1. Malone Ltd had obtained a construction
loan from a bank for $3,200,000 on 2 January 20X0. This loan had a 10% annual interest
rate. Malone’s only other outstanding debt during the period from 2 January 20X0 to 31
March 20X0 consisted of two long term notes. These notes had principal amounts of
$3,000,000 and $6,000,000, bearing interest rates of 11% and 12%, respectively. These
notes were both outstanding throughout the construction period.

Required:

a) Compute the average accumulated expenditures and the amount of interest to be

capitalised for 20X0.
b) State the summary journal entry needed to record the cost of the building in 20X0.
c) Compute the average accumulated expenditures and the amount of interest to be
capitalised for 20X1.

Q.17 – solution

a)
20X0 $
2 January 20X0 $1,100,000 x 12/12 1,100,000
1 May 20X0 $480,000 x 8/12 320,000
1 July 20X0 $640,000 x 6/12 320,000
1 September 20X0 $360,000 x 4/12 120,000

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Average accumulated expenditures 1,860,000

Interest to be capitalised = $1,860,000 x 10% = $186,000

b)
$ $
Building 2,766,000
Cash 2,580,000
Interest expense 186,000

c)
20X1 $
01/01/20X1 $2,766,000 x 3/12 691,500
01/02/20X1 $540,000 x 2/12 90,000
Average accumulated expenditures 781,500

Interest to be capitalised = $781,500 x 10% = $78,150

Note 1: The other two long term notes mentioned turned out to be irrelevant here
because total expenditures were below the specific amount borrowed for the
construction.

Note 2: Interest expense was credited above as it is assumed that normally the interest
expense account would have been charged whenever any interest was paid or accrued
on the construction loan. It is thus necessary to offset the amount of interest being
capitalised with credits to the account.

Q.18

Try to explain to someone who has very little knowledge in accounting why historical cost
is a reasonable choice for valuation and discuss how this principle is applied to plant
assets in general. Also discuss other possible basis of valuation.

Q.18 – solution

At the time when a company acquires a plant asset, cost, which is the amount sacrificed
by the company, is usually the best estimate of that asset’s fair value. This means that
plant assets are usually recorded at the cost incurred by the company in a market
transaction. Such initial valuation is normally seen to be objective and reliable.

The historical cost principle is applied to plant assets in the same manner to non-monetary
assets such as inventory. All sacrifices that are made to gain control over the asset’s

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service potential and to place the asset in position for its intended use (e.g. freight costs)
should be included in the calculation of cost. The principle is upheld by many to be the
most reliable principle in asset valuation, though some might associate that with
accountant’s conservatism. It is suggested that in subsequent valuation by referring to
market value one would be able to obtain the latest value of assets owned. Assets that
are classed as property, plant and equipment may be valued with reference to the cost
model that involves depreciation or with reference to market value which gives rise to
revaluation.

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