# CHAPTER 20. Non-current assets: Acquisition and depreciation CONTENTS

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1 CHAPTER 20 Non-current assets: Acquisition and depreciation CONTENTS 20.1 Cost of various assets 20.2 Depreciation methods and partial years 20.3 Comprehensive problem 20.4 Correcting errors 20.5 Property and plant records

2 20.1 ADDITIONAL PROBLEMS Problem 20.1 Cost of various assets Plentiful Ltd was organised early in During the first 9 months, the company acquired real estate for the construction of a building and other facilities. Operating equipment was purchased and installed and the company began operating activities in October The company s accountant, who was not sure how to record some of the transactions, opened a Property account and recorded debits and (credits) to the account as follows: Cost of real estate purchased as a building site Paid architect s fee for design of new building Paid for the demolition of an old building on the building site purchased in (1) Paid land tax on the real estate purchased as a building site in (1) Paid excavation costs for the new building Made the first payment to the building contractor Paid for equipment to be installed in the new building Received from the sale of salvaged materials from the demolition of the old building Made final payment to the building contractor Paid interest on building loan during construction Paid freight on equipment purchased Paid installation costs of equipment Paid for repair of equipment damaged during installation \$ (6 800 ) Property account balance \$ Required: A. Prepare a schedule like the one following. Analyse each transaction, and enter the payment (receipt) in the appropriate column. Total the columns. Item Land Building Equipment Other B. Prepare a journal entry to close the \$ balance in the Property account and allocate the balances to their appropriate accounts. C. Prepare an entry to record depreciation expense from 1 October to 31 December Useful lives and residual values are: Building Equipment 25 years and \$ years and \$7000 Plentiful Ltd uses the straight-line depreciation method.

3 20.2 Solution A. PLENTIFUL LTD Item Land Building Equipment Other 1. \$ \$ \$ (6 800) \$ \$ \$ \$ \$ B. Land Building Equipment Damage Loss Interest Expense Property To record reallocation of cost. C. Depreciation Expense - Building Depreciation Expense - Equipment Accum. Depr. - Building Accum. Depr. - Equipment Building = ( )/25 = \$ /12 = \$5 900 Equipment = ( )/5 = \$ /12 = \$7 355

4 20.3 Problem 20.2 Depreciation methods and partial years Terrific Ltd operates four types of equipment. Because of their varied functions, management has decided that four different depreciation methods will be used to determine depreciation charges. Information on the equipment is summarised as follows: Equipment type Date acquired Cost Residual value Useful life Depreciation method /7/01 1/7/01 1/1/02 15/4/02 \$ \$ years Reducing balance 6 yearssum-of-years -digits 10 years Straight-line hours Production Use of equipment type 4 was 1200 hours in the year ended 30 June 2002; 3200 hours in 2003; and 2600 hours in Required: Assuming the financial year ends on 30 June and that depreciation is recorded to the nearest month, calculate the depreciation charges for 2002, 2003 and 2004 by preparing a schedule with the following headings: Depreciation expense for year ended 30 June Equipment type Solution TERRIFIC LTD Depreciation expense for year ended 30 June Equipment type Equipment type Rate = = 1.75 =.25 or 25% Equipment type 2 Sum of years digits = 21 Depreciable amount \$ \$ = \$ Depreciation y/e 30/6/ /21 = \$ Depreciation y/e 30/6/03 v /21 = \$ Depreciation y/e 30/6/ /21 = \$ Equipment type 3 Depreciable amount \$ \$5 500 = \$ Straight-line depreciation per annum = \$ = \$2 200 Equipment type 4 Depreciable amount \$ \$4 600 = \$ Depreciation y/e 30/6/ / = \$2 016 Depreciation y/e 30/6/ / = 5616 Depreciation y/e 30/6/ / = Date Depreciation Carrying Amount 1/7/01 \$ /6/02 \$ /6/ /6/

5 20.4 Problem 20.3 Comprehensive problem Over a 4-year period, Davis Ltd completed the following transactions affecting plant. The company uses straight-line depreciation and records depreciation to the nearest month Jan. July Dec July 30 Dec June 26 Dec Jan. Dec Purchased a new machine for a cash price of \$ Freight charges of \$442 and installation expenditures of \$1758 were paid in cash. The machine has an estimated useful life of 5 years and a residual value of \$4000. Purchased a used delivery van for \$ Cash expenditures were made to repaint the van at a cost of \$655 and four new tyres costing \$345. The van has an estimated useful life of 4 years and an expected residual value of \$1000. Recorded depreciation expense. Paid for repairs and maintenance on the machine and van at a cost of \$228. Recorded depreciation expense. Installed a fence around the company property at a cost of \$5500. The fence has an estimated useful life of 10 years with no residual value. (Debit the cost to a Land Improvements account.) Recorded depreciation expense. Completely overhauled the machine purchased on 3 January 2000, at a cost of \$12 000, after which the remaining useful life was estimated to be 3 years. Recorded depreciation expense. Required: A. Prepare journal entries to record the transactions of Davis Ltd. B. Prepare a schedule showing the cost, accumulated depreciation and carrying amount of each asset after recording depreciation on 31 December 2003.

6 20.5 Solution A. DAVIS LTD 2000 Jan. 3 Machinery Cash at Bank To record acquisition of machine. July 2 Delivery Van Cash at Bank To record acquisition of delivery van. Dec. 31 Depreciation Expense - Machinery Depreciation Expense - Delivery Van Accum. Depr. - Machinery Accum. Depr. - Delivery Van ( )/5= ( )/4 = x 6/12 = July 30 Repairs and Maintenance Expense 228 Cash at Bank 228 To record repairs on machine and van. Dec 31 Depreciation Expense - Machinery Depreciation Expense - Delivery Van Accum. Depr. - Machinery Accum. Depr. - Delivery Van June 26 Land Improvements Cash at Bank To record installation of fence. Dec. 31 Depreciation Expense - Machinery Depreciation Expense - Delivery Van Depr. Expense - Land Improvements* 275 Accum. Depr. - Machinery Accum. Depr. - Delivery Van Accum. Depr. - Land Improvements 275 * 5 500/10 = 550 6/12 (continued)

7 Jan. 5 Machinery Cash at Bank To record overhaul costs. Dec. 31 Depreciation Expense - Machinery Depreciation Expense - Delivery Van Depreciation Exp. - Land Improvements 550 Accum. Depr. - Machinery* Accum. Depr. - Delivery Van Accum. Depr. - Land Improvements 550 * Total cost ( ) \$ Accum. depr. to 1 Jan ( ) Carrying amount Estimated residual value Amount to be depreciated Remaining useful life 3 years Depreciation expense per year \$ B. Delivery van Machinery Land improvements Cost \$ \$ \$5 500 Accum. depreciation Carrying amount \$2 900 \$ \$4 675

8 20.7 Problem 20.4 Correcting errors At the end of Watson Ltd s financial year, 30 June 2003, the following items must be resolved before adjusting entries and financial statements are prepared: 1. On 1 July 2002, Watson Ltd purchased a used machine for \$ cash. The cost was debited to the Machinery account. Prior to use, additional cash expenditures were made for painting and repairing the machine, \$3200, and installing and testing the machine, \$2600. These additional expenditures were debited to Repairs and Maintenance Expense. The repairs and installation were completed on 1 October 2002, and the machine was put to use. The machine has an estimated useful life of 5 years with a residual value of \$4000. Watson Ltd uses straight-line depreciation and records depreciation to the nearest month. 2. A small building and land were purchased on 2 July 2002, for \$ cash, debited to the Land account. The appraised values of the building and land were \$ and \$25 000, respectively. The building has an estimated useful life of 20 years with a residual value of \$6000. Watson Ltd uses straight-line depreciation for buildings. 3. A new truck was purchased on 1 March 2003; Watson Ltd paid cash of \$ and also obtained a 12-month loan payable for the amount of \$ The Trucks account was debited for \$ The truck has an estimated life of 4 years with a residual value of \$ and is to be depreciated by the reducing-balance method. However, due to an oversight, the business used the straight-line method. Required: A. Prepare journal entries on 30 June 2003 to correct the accounts. B. Prepare journal entries as necessary to record depreciation expense after the corrections in requirement A have been made. Solution WATSON LTD A June 30 Machinery Repairs and Maintenance Expense To correct error in cost of machinery. 30 Buildings Land To correct error in recording purchase of land and buildings. Total appraised value ( ) = \$ Cost allocated to building: ( ) \$ = \$ B. Depreciation Expense - Machinery [1] Depreciation Expense - Buildings [2] Accum. Depr. - Machinery Accum. Depr. - Buildings [1] \$ \$5 800 \$4 000 = \$ \$49 800/5 years = \$ /12 = \$7 470 [2] \$ \$6 000 = \$54 000/20 years = \$2 700

9 20.8 Problem 20.5 Property and plant records Selected transactions affecting the Machinery account of Moroni Ltd during the year ended 30 June 2001 follow. The company uses reducing-balance depreciation and calculates depreciation expense to the nearest month. July Dec Purchased from Raider Ltd a dye machine (Serial No. QST44120) for \$ cash. The estimated life of the machine is 5 years and its estimated residual value is \$4000. Purchased from Barker Ltd an automatic loom (Serial No. MJ382100J) for \$ cash. The machine has a useful life of 4 years and a residual value of \$ Required: A. Prepare journal entries to record the purchase of the assets and to record depreciation expense on 30 June 2001 and B. Open a Machinery account (No. 202) and an Accumulated Depreciation Machinery account (No. 203), and prepare subsidiary property and plant records for the two assets. Post the journal entries to the general ledger accounts and to the subsidiary records. Solution A. MORONI LTD 2001 July 12 Machinery Cash at Bank To record acquisition of dye machine. Dec. 31 Machinery Cash at Bank To record acquisition of drill press. June 30 Depreciation Expense - Machinery Accum. Depr. - Machinery Dye machine = \$ x 35% \$ Loom = \$ x 23% x 6/ Total \$ Note: Dye machine = =.35 or 35% approx Note: Loom = =.23 or 23% approx June 30 Depreciation Expense - Machinery Accum. Depr. - Machinery Dye machine = \$ \$ = \$ % \$7 963 Loom = \$ \$4 140 = \$ % Total \$ (continued)

10 20.9 B. Account Machinery No. 202 Date Explanation Post Ref. Debit Credit Balance 2001 July Dec Account Accumulated Depreciation Machinery No. 203 Date Explanation Post Ref. Debit Credit Balance 2001 June June PROPERTY AND PLANT RECORD Item Dye Machine Account No. 202 Serial No. QST44120 General Ledger Machinery Account Purchased from Beech Ltd Useful life 5 years Residual Value \$4 000 Depn method Reducing-balance Rate 35% Date Explanation p/r Asset Depreciation Dr Cr Bal Dr Cr Bal 12/07/ /06/ /06/ PROPERTY AND PLANT RECORD Item Automatic Loom Account No. 202 Serial No. MJ382100J General Ledger Machinery Account Purchased from Park and Sons Useful life 4 years Residual Value \$ Depn method Reducing-balance Rate 23% Date Explanation p/r Asset Depreciation Dr Cr Bal Dr Cr Bal 31/12/ /06/ /06/

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