ch09 SM Leo 10e

Solutions Manual
to accompany
Company Accounting 10e

prepared by
Ken Leo
John Hoggett
John Sweeting
Jeffrey Knapp
Sue McGowan
© John Wiley & Sons Australia, Ltd 2015

Solution Manual to accompany Company Accounting 10e
Chapter 9 - Property, plant and equipment
REVIEW QUESTIONS
1. What assets constitute property, plant and equipment?
Para 6 of AASB 116 defines PPE as follows:
Property, plant and equipment are tangible items that:

(a) are held for use in the production or supply of goods or services, for rental to
others, or for administrative purposes; and
(b) are expected to be used during more than one period.
2. What are the recognition criteria for property, plant and equipment?
Para 7 of AASB 116 contains the following recognition criteria:
The cost of an item of property, plant and equipment shall be recognised as an asset if,
and only if:
(a) it is probable that future economic benefits associated with the item will flow to the
entity; and
(b) the cost of the item can be measured reliably.
3. How should items of property, plant and equipment be measured at point of initial
recognition, and would gifts be treated differently from acquisitions?
Para 15 of AASB 116 requires the initial measurement to be at cost.
The measurement rule applies regardless of how the entity obtains the asset. A gift has a
zero cost.
4. How is cost determined?
Para 16 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.
(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
© John Wiley and Sons Australia, Ltd 2015 9.1

Chapter 9: Property, plant and equipment
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.
5. What choices of measurement model exist subsequent to assets being initially

recognised?
Para 29 of AASB 116 states:
An entity shall choose either the cost model in paragraph 30 or the revaluation model
in paragraph 31 as its accounting policy and shall apply that policy to an entire class of
property, plant and equipment.1
6. What factors should entities consider in choosing alternative measurement

models?
Relevance of information provided: generally current information is preferred to past

information.
Reliability of the information: cost measures are generally more reliable than valuation
measures.
Cost of providing the information: Adoption of the valuation model entails costs of
valuation and audit.
7. What is meant by ‘depreciation expense’?
Para 6 of AASB 116 defines depreciation as:
Depreciation is the systematic allocation of the depreciable amount of an asset over its
useful life
8. How is useful life determined?
Useful life is:

(a) the period over which an asset is expected to be available for use by an entity; or
(b) the number of production or similar units expected to be obtained from the asset by
an entity
Paras 56-57 state:

56. The future economic benefits embodied in an asset are consumed by an entity
principally through its use. However, other factors, such as technical or
commercial obsolescence and wear and tear while an asset remains idle, often
result in the diminution of the economic benefits that might have been obtained
from the asset. Consequently, all the following factors are considered in
determining the useful life of an asset:
(a) expected usage of the asset. Usage is assessed by reference to the asset's
expected capacity or physical output.
(b) expected physical wear and tear, which depends on operational factors such as
the number of shifts for which the asset is to be used and the repair and
maintenance programme, and the care and maintenance of the asset while idle.
(c) technical or commercial obsolescence arising from changes or improvements
in production, or from a change in the market demand for the product or service
output of the asset.
(d) legal or similar limits on the use of the asset, such as the expiry dates of
related leases.
57. The useful life of an asset is defined in terms of the asset's expected utility to the
entity. The asset management policy of the entity may involve the disposal of
assets after a specified time or after consumption of a specified proportion of the
future economic benefits embodied in the asset. Therefore, the useful life of an
asset may be shorter than its economic life. The estimation of the useful life of
the asset is a matter of judgement based on the experience of the entity with
similar assets.
9. What is meant by ‘residual value’ of an asset?
The residual value of an asset is the estimated amount that an entity would currently
obtain from disposal of the asset, after deducting the estimated costs of disposal, if the
asset were already of the age and in the condition expected at the end of its useful life.
10. How does an entity choose between depreciation methods, for example, straight-
line versus reducing-balance models?
The depreciation method used shall reflect the pattern in which the asset's future
economic benefits are expected to be consumed by the entity.
Choice is based on which method best reflects the pattern of benefits expected to be
consumed by a specific asset given its use in a specific entity.

11. What is meant by ‘components depreciation’?
Note paras 43-47 of AASB 116:
43. Each part of an item of property, plant and equipment with a cost that is
significant in relation to the total cost of the item shall be depreciated separately.
44. An entity allocates the amount initially recognised in respect of an item of
property, plant and equipment to its significant parts and depreciates separately
each such part. For example, it may be appropriate to depreciate separately the
airframe and engines of an aircraft, whether owned or subject to a finance lease.
45. A significant part of an item of property, plant and equipment may have a useful
life and a depreciation method that are the same as the useful life and the
depreciation method of another significant part of that same item. Such parts may
be grouped in determining the depreciation charge.
46. To the extent that an entity depreciates separately some parts of an item of
property, plant and equipment, it also depreciates separately the remainder of the
item. The remainder consists of the parts of the item that are individually not
significant. If an entity has varying expectations for these parts, approximation
techniques may be necessary to depreciate the remainder in a manner that
faithfully represents the consumption pattern and/or useful life of its parts.
47. An entity may choose to depreciate separately the parts of an item that do not
have a cost that is significant in relation to the total cost of the item.
Components depreciation means breaking an asset down into its component parts for separate
depreciation of those parts.
12. Under the revaluation model, how is a revaluation increase accounted for?
If an asset's carrying amount is increased as a result of a revaluation, the increase shall

be recognized in other comprehensive income and accumulated equity under the
heading of revaluation surplus. However, the increase shall be recognised in profit or
loss to the extent that it reverses a revaluation decrease of the same asset previously
recognised in profit or loss.
13. Under the revaluation model, how is a revaluation decrease accounted for?
If an asset's carrying amount is decreased as a result of a revaluation, the decrease

shall be recognised in profit or loss. However, the decrease shall be recognized in
other comprehensive income to the extent of any credit balance existing in the
revaluation surplus in respect of that asset. The decrease recognized in other
comprehensive income reduces the amount accumulated in equity under the heading
of revaluation surplus.

14. When, and why, must tax-effect be considered in accounting for revaluation
increases and decreases?
The effects of taxes on income, if any, resulting from the revaluation of property, plant
and equipment are recognised and disclosed in accordance with AASB 112 Income
Taxes.
Tax-effects are accounting at the point of revaluation only when there is an effect on the
asset revaluation surplus. This is because of the recognition of equity at that point.
Where revaluation decrements occur, any tax-effect is calculated at the end of the
period when the balance day adjustment for tax is determined.
15. Should accounting for revaluation increases and decreases be done on an asset-by-
asset basis or on a class-of-assets basis?
Paras 36-38 of AASB 116 state:
36. If an item of property, plant and equipment is revalued, the entire class of
property, plant and equipment to which that asset belongs shall be revalued.
37. A class of property, plant and equipment is a grouping of assets of a similar
nature and use in an entity's operations. The following are examples of separate
classes:
(a) land;
(b) land and buildings;
(c) machinery;
(d) ships;
(e) aircraft;
(f) motor vehicles;
(g) furniture and fixtures; and
(h) office equipment.
38. The items within a class of property, plant and equipment are revalued
simultaneously to avoid selective revaluation of assets and the reporting of
amounts in the financial statements that are a mixture of costs and values as at
different dates. However, a class of assets may be revalued on a rolling basis
provided revaluation of the class of assets is completed within a short period and
provided the revaluations are kept up to date.
16. What differences occur between asset-by-asset or class-of-asset bases in accounting

for revaluation increases and decreases?
Using an asset-by asset basis means that decrements affect the profit or loss for the
period while increments are taken directly to equity.

With a class basis, by netting off increments and decrements within a class, there will
be a net effect, affecting either profit or loss or equity depending on whether decrements
are greater than or less than increments.
17. When should property, plant and equipment be derecognised?
The carrying amount of an item of property, plant and equipment shall be derecognised:
(a) on disposal; or
(b) when no future economic benefits are expected from its use or disposal.

CASE STUDY QUESTIONS
Case study 1 Fair value basis for measurement

The management of Ransom Ltd has decided to use the fair value basis for the
measurement of its equipment. Some of this equipment is very hard to obtain and has in
fact increased in value over the current period. Management is arguing that, as there
has been no decline in fair value, no depreciation should be charged on these pieces of
equipment. Discuss.
Para 50 of AASB 116 notes that depreciation is a process of allocation. Depreciation is not a
change in value.
Depreciation is measuring the change in value due to the use of an asset over the period, and
not changes in value due to other factors such as changes in customer tastes.
The consumption of benefits is considered to be separate from changes in the fair value of an
asset.
Consider the example [in section 7.5.1 of the text] used by the Accounting Standards Board
in the UK in its 1996 Discussion Paper concerning the drop in value of a new car during its
first year.
Case study 2 Straight-line vs diminishing balance depreciation

Silence Ltd uses tractors as a part of its operating equipment, and it applies the
straight-line depreciation method to depreciate these assets. Silence Ltd has just taken
over Lambs Ltd, which uses similar tractors in its operations. However, Lambs Ltd has
been using a diminishing balance method of depreciation for these tractors. The
accountant in Silence Ltd is arguing that for both entities the same depreciation method
should be used for tractors. Provide arguments for and against this proposal.
The arguments for and against must be based on the pattern in which the assets’ future
economic benefits are expected to be consumed by the entities.
If both entities use the assets such that the pattern of consumption of benefits is the same,
then the same depreciation method should be used.
If the entities use the tractors in ways such that the pattern of consumption of benefits is
different then different methods of depreciation can be used.
The method chosen must be applied consistently from period to period unless there is a
change in the expected pattern of consumption of those future economic benefits.
Case study 3 Annual depreciation charge

A company is in the movie rental business. Movies are generally kept for 2 years and
then either sold or destroyed. However, management wants to show increased profits,
and believes that the annual depreciation charge can be lowered by keeping the movies
for 3 years. Discuss.

Changing the number of years does not necessarily change the annual depreciation charge.
If after 2 years the movies are worth nothing – hence they are normally destroyed at this point
– then to keep the movies for another year simply means that there is no depreciation charge
in the 3rd year as all the benefits have been received by the end of the 2nd year and there are
none received in the third year.
If the movies could be still rented in a 3rd period, again there may be no change in the
depreciation in the first two years. The depreciation charge is also a function of the residual
value of the asset. Consider the following case:
Scenario 1: Movie cost $30 and has a residual value at the end of year 2 of $15. Assuming
equal benefits over the 2 years [unlikely], the annual depreciation charge is $7.50.
Scenario 2: Movie cost $30 and has a residual value at end of year 3 of $5. Assuming equal
benefits [very unlikely], the annual depreciation charge is $8.33.
Case study 4 Decline in value of assets

A new accountant has been appointed to the firm of Simpsons Ltd, which owns a large
number of depreciable assets. Upon analysing the entity’s depreciation policy, the
accountant has implemented a new policy based on the principle that the depreciation
rate for particular assets should measure the decline in the value of the assets. Discuss
this policy change.
It could be argued that there are 2 concepts of depreciation, namely:

- a process of allocation, and
- a change in the value of an asset.
There are at least 3 variables that cause a change in value of an asset over the period:
- a reduction in value due to the use of the asset over the period,
- an increase/decrease in the value due to a change in the general price level,
- a change in the specific price level for this type of asset
Where depreciation is calculated as an allocation of the cost of the asset, what is being
measured is variable (1) above. If depreciation is measured as a change in the value of an asset,
the depreciation charge is a mixture of all the above variables.
AASB 116 para. 6 describes depreciation as a systematic allocation, hence adopting the
process of allocation approach.
Hence if the accountant wants to adopt accounting policies that are compliant with
international accounting standards, then he/she will need to change the depreciation policy to
one of allocation rather than change in value.
To discuss the differences in approach, consider the example [in section 7.5.1 of the text]
used by the Accounting Standards Board in the UK in its 1996 Discussion Paper concerning
the drop in value of a new car during its first year.

Case study 5 Depreciation charges

A new accountant has been appointed to Outlander Ltd and has implemented major
changes in the calculation of depreciation. As a result, some parts of the factory have
much larger depreciation charges. This has incensed some operations managers who
believe that, as they take particular care with the maintenance of their machines, their
machines should not attract large depreciation charges that reduce the profitability of
their operations and reflect badly on their management skills. The operations managers
plan to meet the accountant and ask for change. How should the new accountant
respond?
The determination of the depreciation charge relies on the consideration of a large number of
factors such as useful life, residual value, and consumption of benefits.
Some parts of the factory may have:
- assets with high initial costs
- low residual values
- high patterns of use on initial acquisition
These parts of the factory will attract high depreciation charges.

However, careful maintenance may lead to:
- higher residual values
- longer useful lives
The depreciation charge per annum can then be reduced.

Good management will not judge performance on factors outside the control of the
employees. Cost savings may be a better measure of performance than profitability.
Case study 6 Depreciation charges

The management of Predator Ltd has been analysing the financial reports provided by
the accountant, who has been with the firm for a number of years. Management has
expressed its concern over depreciation charges being made in relation to the
company’s equipment. In particular, it believes that the depreciation charges are not
high enough in relation to the factory machines because new technology applied in that
area is rapidly making the machines obsolete. Management’s concern is that the
machines will have to be replaced in the near future and, with the low depreciation
charges, the fund will not be sufficient to pay for the replacement machines. Discuss.
Two key mistakes are being made by management:

(i) the depreciation charge relates to the replacement cost of the asset, and
(ii) charging depreciation results in the creation of a fund for the replacement of assets.
Re (i): depreciation is an allocation of the depreciable amount of an asset. The depreciable

amount is the cost or other amount substitute for cost. Under AASB 116, there are two
measurement models available namely the cost model and the revaluation model. Under the

revaluation model, an asset can be carried at fair value.

Neither of these models result in a depreciation charge that measures the replacement cost of
the asset.
However, note para. 33 of AASB 116: where there is no market-based evidence of fair value,
an entity may use, as an estimate of fair value, a depreciated replacement cost approach.
AASB 116 does not give any information as to how this method works, for example whether
it is based on the replacement cost of a similar asset or the replacement cost of a new asset.
Given that replacement cost is used as an estimate of fair value, it is more likely that a
replacement cost of used assets would be used. Again, the depreciation charge is not related
to the cost of new replacement assets.
Re (ii):Depreciation is a book entry. It does not reflect cash flows. There are no monies
deposited in a sinking fund to replace the assets being depreciated.
Even if the entity creates an asset replacement reserve as an appropriation of retained
earnings, there is no cash fund as this is also a book entry.
Case study 7 Building costs

Tourist Ltd has acquired a new building. Which of the following items should be
included in the cost of the building?
(a) Stamp duty
(b) Real estate agent’s fees
(c) Architect’s fees for drawings for internal adjustments to the building to be made
before use
(d) Interest on the bank loan to acquire the building, and an application fee to the bank
to get the loan, which is secured on the building
(e) Cost of changing the name on the building
(f) Cost of changing the parking bays
(g) Cost of refurbishing the lobby to the building to attract customers and make it more
user friendly
See paragraph 16 of AASB 116

Include:
(a) stamp duty
(b) real estate agent’s fees
(c) architect’s fees
(d) interest [ may be expensed or capitalised – see AASB Borrowing Costs]
(e) costs of changing name on building
(g) costs of refurbishing lobby
Exclude:
(f) these may be considered as a separate asset, depends for example whether the parking
bays are an integral part of the building or external to the building

Case study 8 Capitalisation

Transporter Ltd has acquired a new machine, which it has had installed in its factory.
Which of the following items should be capitalised into the cost of the building?
(a) Labour and travel costs for managers to inspect possible new machines and for
negotiating for a new machine
(b) Freight costs and insurance to get the new machine to the factory
(c) Costs for renovating a section of the factory, in anticipation of the new machine’s
arrival, to ensure that all the other parts of the factory will have easy access to the
new machine
(d) Cost of cooling equipment to assist in the efficient operation of the new machine
(e) Costs of repairing the factory door, which was damaged by the installation of the
new machine
(f) Training costs of workers who will use the machine
See paragraph 16 of AASB 116.

Include:
(a) labour and travel costs
(b) freight costs
(c) costs of renovating
(d) cost of cooling equipment
Exclude:
(e) costs of repair – these are not directly attributable to bringing the asset to its location &
condition for operation. These costs should be expensed.
(f) training costs – these benefits cannot be controlled
Case study 9 Expensing of costs

Blitz Ltd has acquired a new building for $500 000. It has incurred incidental costs of
$10 000 in the acquisition process for legal fees, real estate agent’s fees and stamp
duties. Management believes that these costs should be expensed because they have not
increased the value of the building and, if the building was immediately resold, these
amounts would not be recouped. In other words, the fair value of the building is
considered to still be $500 000. Discuss how these costs should be accounted for.
According to para 16 of AASB 116, the cost of an asset includes any directly attributable
costs. The $10 000 incidental costs should therefore be include in the cost of the asset. The
cost is then $510 000.
Paragraph 15 of AASB 116 requires an asset to be recognised initially at cost – in this case
$510 000.
If the asset is subsequently measured under the cost model: Whether or not the asset should
be written down depends on whether the asset is impaired. Paragraph 63 of AASB 116
requires an entity to apply AASB 136 Impairment of Assets. If the asset is a part of a cash
generating unit, and the recoverable amount of the CGU is greater than the carrying amount
of the assets of the CGU then the building will not be written down.

If the asset is subsequently measured under the revaluation model: As the fair value is only
$500 000, a revaluation decrement would be determined and an expense recognised.

PRACTICE QUESTIONS
Question 9.1 Initial recognition of an asset

Miami Ltd recently acquired a second-hand machine for installation in its factory. The
machine was acquired from Vice Ltd, with Miami Ltd giving a block of land plus $5 000
cash in exchange for the machine. The land had been acquired by Miami Ltd for
$200 000 three years ago, but was considered to have a fair value of $300 000 at the date
of exchange. The machine had a carrying amount in the records of Vice Ltd of $310 000
at this date.
Miami Ltd planned to use the machine in its main factory. The installation of the
machine would require that it be cemented into the factory floor in order to achieve
sufficient stability for the machine to operate. The cost is expected to be $550. However,
when the machine is replaced in three years’ time, the costs of removal of the machine
are expected to be $250. As the operation of the machine requires some technical
knowledge, current staff will need to be trained for its use. As it has supplied the
machine, Vice Ltd has agreed to supply training at a cost of $250.
Required
The accountant of Miami Ltd is unsure of how to account for the acquisition of the
machine and has asked for your advice. Prepare a report providing detailed advice to
the accountant.
1. The appropriate accounting standard to apply is AASB 116 Property, Plant and
Equipment as the machine meets the definition of property, plant and equipment.
2. Under AASB116, the machine must initially be measured at cost.
3. Cost is defined as having 3 components, purchase price, directly attributable costs and
dismantling costs.
4. Purchase price is based on the fair value of what is given up by the acquirer. In this case,
the purchase price is the fair value of the land plus the cash, namely $305 000.
5. Costs directly attributable to the acquisition and necessary to get the machine into the
condition and location for management to use the machine can be capitalised into the
cost of the machine. In this case, the $550 cost for the cementing of the machine into the
factory floor meets this criterion, but the training of the staff does not.
6. The dismantling costs can only be capitalised if there is an obligation at the time of
acquisition of the asset for such dismantling. Such an obligation does not exist in this
case. Therefore the dismantling costs on replacement of the machine cannot be
capitalised into the cost of the machine.
7. The machine must initially be recognised at a cost of $305 550.

Question 9.2 Application of revaluation model

At 1 July 2014, Twister Ltd acquired the following non-current assets:
Equipment $100 000

Vehicles 80 000
They are in different classes of non-current assets and are to be measured at fair
value. The expected useful lives of vehicles and equipment are 5 years and 10 years,
respectively.
At 30 June 2015, the fair values of both assets were assessed. The equipment had a
fair value of $82 000, and the vehicles, $70 000. The remaining useful lives were assessed
to be 8 years for equipment and 7 years for vehicles.
At 30 June 2016, the fair value of equipment was assessed to be $81 750 and the fair
value of vehicles was $55 000.
Required
Prepare the journal entries for Twister Ltd for the years ending 30 June 2015 and 2016.
Twister Ltd
General Journal
30 June 2015
Depreciation expense – equipment Dr 10 000

Accumulated depreciation – equipment Cr 10 000
(Depreciation – $100 000 / 10 years)
Accumulated depreciation - equipment Dr 10 000

Equipment Cr 10 000
(Write down of equipment to carrying amount: $90 000)
Expense- write-down of equipment Dr 8 000

Equipment Cr 8 000
(Revaluation from carrying amount to fair value:
$90 000 to $82 000)
Depreciation expense – vehicles Dr 16 000

Accumulated depreciation – vehicles Cr 16 000
(Depreciation – 20% x $80 000)
Accumulated depreciation – vehicles Dr 16 000

Vehicles Cr 16 000
(Write-down to carrying amount: $64 000)
Vehicles Dr 6 000
Gain on revaluation of vehicles (OCI) Cr 6 000
(Revaluation increment: $64 000 to $70 000)
Income tax expense (OCI) Dr 1 800

Deferred tax liability Cr 1 800

(Tax effect of revaluation increment)
Gain on revaluation of vehicles (OCI) Dr 6 000

Income tax expense (OCI) Cr 1 800
Asset revaluation surplus - vehicles Cr 4 200
(Accumulation of net revaluation gain in equity)
30 June 2016
Depreciation Expense – Equipment Dr 10 250

Accumulated depreciation – Equipment Cr 10 250
(Depreciation – $82 000 / 8years)
Accumulated depreciation - Equipment Dr 10 250

Equipment Cr 10 250
(Write down from previous FV $82 000 to
carrying amount $71 750)
Equipment Dr 10 000
Gain on revaluation of equipment (P/L) Cr 8 000
Gain on revaluation of equipment (OCI) Cr 2 000
(Revaluation of equipment from $71 750 to $81 750,
with prior revaluation write-down of $8 000)
Income tax expense (OCI) Dr 600

Deferred tax liability Cr 600
(Tax effect of revaluation gain)
Gain on revaluation of equipment (OCI) Dr 2 000

Income tax expense (OCI) Cr 600
Asset revaluation surplus Cr 1 400
(Accumulation of revaluation gain in equity)
Depreciation expense – vehicles Dr 10 000

Accumulated Depreciation – vehicles Cr 10 000
(Being depreciation – $70 000 / 7 years)
Accumulated depreciation – vehicles Dr 10 000

Vehicles Cr 10 000
(Write down of vehicles to carrying amount
of $60 000)
Loss on revaluation of vehicles (OCI) Dr 5 000

Vehicles Cr 5 000
(Write down to fair value: $60 000 to $55 000)
Deferred tax liability Dr 1 500

(Tax effect of write down to fair value)

Asset revaluation surplus Dr 3 500

Loss on revaluation of vehicles (OCI) Cr 5 000
(Reduction in accumulated equity due to
revaluation decrement on vehicles)

Question 9.3 Initial recognition of an asset, depreciation

Mongol Trading operates in a very competitive field. To maintain its market position, it
purchased two new machines for cash on 1 January 2016. It previously rented
machines. Machine A cost $40 000, and machine B cost $100 000. Each machine was
expected to have a useful life of 10 years, and residual values were estimated at $2000
for machine A and $5000 for machine B.
Due to technological advances, Mongol Trading decided to replace machine A. It
traded in machine A on 31 March 2018 for machine C, which cost $64 000. A trade-in of
$28 000 was allowed for machine A, and the balance of machine C’s cost was paid in
cash. Machine C was expected to have a useful life of 8 years and a residual value of
$8000.
On 2 July 2018, extensive repairs were carried out on machine B at a cash cost of
$66 000. Mongol Trading expected these repairs to extend machine B’s useful life by 4
years and to increase machine B’s estimated residual value to $13 450. Machine B was
eventually sold for cash on 1 April 2020 for $115 000.
Mongol Trading uses the straight-line depreciation method, recording depreciation to
the nearest month. The end of the reporting period is 30 June.
Required
Prepare general journal entries to record the above transactions and depreciation
journal entries required at the end of each reporting period up to and including 30 June
2020.
1. GENERAL JOURNAL ENTRIES

01/01/16 Machinery Dr 140 000
Cash Cr 140 000
(Machines A & B purchased)
30/06/16 Depreciation - machinery Dr 6 650

Accumulated depreciation - machinery Cr 6 650
(Depreciation at year end:
[A: (40 000–2 000)/10 x ½ = 1 900]
[B: (100 000-5 000)/10 x ½ = 4 750]

[A: (40 000–2 000)/10 = 3 800]
[B: (100 000-5 000)/10 = 9 500])
31/03/18 Depreciation - Machinery Dr 2 850

Accumulated Depreciation - Machinery Cr 2 850
(Depreciation up to point of sale:
A: (40 000–2 000)/10 x 9/12)
31/03/18 Accumulated depreciation – machinery

(1900 + 3800 + 2850) Dr 8 550
Carrying amount of machinery sold
(40 000 – 8 550) Dr 31 450
Machinery Cr 40 000

(De-recognition of asset sold - Machine A)
31/03/18 Machinery Dr 64 000

Proceeds – Machine A Cr 28 000
Cash Cr 36 000
(Purchase of Machine C and trade-in of Machine A)
30/06/18 Depreciation - Machinery Dr 11 250

Accumulated Depreciation - Machinery Cr 11 250
[B: 9 500] + [C: (64 000-8 000)/8 x 3/12 = 1 750])
02/07/18 Machinery Dr 66 000

Cash Cr 66 000
(Cost of extensive repairs on machine B)
Cost of Machine B = 100 000 + 66 000

= 166 000
Depreciation up to repair date = 4 750 + 9500 +9500
= 23 750
Residual value = 13 450
Depreciable amount = 166 000 – 23 750 – 13 450
= 128 800
Useful life remaining = 10 – 2.5 + 4
= 11.5 years
Depreciation p.a. = 128 800/11.5
= 11 200
30/06/19 Depreciation – machinery Dr 18 200

Depreciation at year end:
(C: (64 000–8 000)/8 = 7 000)
(B: 128 800/11.5 = 11 200)

(Depreciation up to point of sale:
B: 11 200 x 9/12)
01/04/20 Cash Dr 115 000

Proceeds – sale of machine B Cr 115 000
(Sale of machine B)
01/04/20 Accumulated depreciation – machinery

(23 750 + 11 200 + 8 400) Dr 43 350
Carrying amount of machinery sold Dr 122 650
Machinery Cr 166 000
(De-recognition of Machine B on sale)


(Depreciation at year end: machine C)

Question 9.4 Revaluation of assets

On 30 June 2016, the statement of financial position of Miss Congeniality Ltd showed
the following non-current assets after charging depreciation:
Building $ 300 000

Accumulated (100 000) $200 00
Depreciation 0
Motor Vehicle 120 000
Accumulated (40 000) 80 000
Depreciation
The company has adopted fair value for the valuation of non-current assets. This has
resulted in the recognition in previous periods of an asset revaluation surplus for the
building of $14 000. On 30 June 2016, an independent valuer assessed the fair value of
the building to be $160 000 and the vehicle to be $90 000. The income tax rate is 30%.
Required
A. Prepare any necessary entries to revalue the building and the vehicle as at 30 June
2016.
B. Assume that the building and vehicle had remaining useful lives of 25 years and 4
years respectively, with zero residual value. Prepare entries to record depreciation
expense for the year ended 30 June 2017 using the straight-line method.
A.
*NOTE: there is an amount of $14 000 in the asset revaluation surplus (ARS) account for
building from previous periods. This would have been recognised from net revaluation gains
to the building and can therefore be decreased with any revaluation losses on building before
those losses are required to be recognised directly in the P&L. The amount in the ARS
account is net of tax. Therefore, the full amount of previous revaluation gains for the
buildings would have been $20 000 ($14 000 / 0.7). The tax amount would be recognised in
the Deferred Tax Liability account for $6 000.
30 June 2016
Accumulated depreciation – Building Dr 100 000
Building Cr 100 000
(Writing down to carrying amount)
Loss on revaluation of building (P&L) Dr 20 000

Loss on revaluation of building (OCI) Dr 20 000
Building Cr 40 000
(Revaluation downwards of building - *Note)
Deferred tax liability Dr 6 000

(Tax-effect of revaluation decrement on
previously revalued asset - *Note)
Asset revaluation surplus - Building Dr 14 000

Loss on revaluation of building (OCI) Cr 20 000

(Reduction in accumulated equity due to

revaluation decrement on building - *Note)
Accumulated depreciation – Vehicle Dr 40 000

Vehicle Cr 40 000
Vehicle Dr 10 000
Gain on revaluation of vehicle (OCI) Cr 10 000
(Revaluation to fair value)

(Tax-effect of revaluation increment)
Gain on revaluation of vehicle (OCI) Dr 10 000

Asset revaluation surplus - vehicle Cr 7 000
B.
30 June 2017
Depreciation expense – Building Dr 6 400
Accumulated depreciation – Building Cr 6 400
($160 000/25)
Depreciation expense – Vehicle Dr 22 500

Accumulated depreciation – Vehicle Cr 22 500
($90 000/ 4)

In the 30 June 2016 annual report of Payback Ltd, the equipment was reported as
follows:
Equipment (at cost) $ 500 000

Accumulated Depreciation (150 000)
350 000
The equipment consisted of two machines, Machine A and Machine B. Machine A had
cost $300 000 and had a carrying amount of $180 000 at 30 June 2016, and Machine B
had cost $200 000 and was carried at $170 000. Both machines are measured using the
cost model, and depreciated on a straight-line basis over a 10-year period.
On 31 December 2016, the directors of Payback Ltd decided to change the basis of
measuring the equipment from the cost model to the revaluation model. Machine A was
revalued to $180 000 with an expected useful life of 6 years, and Machine B was
revalued to $155 000 with an expected useful life of 5 years.
At 30 June 2017, Machine A was assessed to have a fair value of $163 000 with an
expected useful life of 5 years, and Machine B’s fair value was $136 500 with an
expected useful life of 4 years.
The tax rate is 30%.
Required
A. Prepare the journal entries during the period 1 July 2016 to 30 June 2017 in relation
to the equipment.
B. According to accounting standards, on what basis may management change the
method of asset measurement, for example from cost to fair value?
PAYBACK LTD
31 December 2016 – Change from cost model to revaluation model
Depreciation expense – Machine A Dr 15 000

Accumulated depreciation Cr 15 000
(1/2 x 10% x $300 000)
Depreciation expense – Machine B Dr 10 000

(1/2 x 10% x $200 000)
Machine A Machine B
Cost 300 000 Cost 200 000

Accum depn 135 000 Accum depn 40 000
165 000 160 000
Fair value 180 000 Fair value 155 000
Increment 15 000 Decrement 5 000
Accumulated depreciation – Machine A Dr 135 000

Machine A Cr 135 000

(Writing the asset down to carrying amount)
Machine A Dr 15 000
Gain on revaluation of machinery (OCI) Cr 15 000
(Revaluation of asset)
Income tax expense – gain on

revaluation of asset (OCI) Dr 4 500
(Tax-effect of revaluation)
Gain on revaluation of machinery (OCI) Dr 15 000

Asset revaluation surplus – Machine A Cr 10 500
(Accumulation of net revaluation gain in equity)
Accumulated depreciation – Machine B Dr 40 000

Machine B Cr 40 000
(Writing the asset down to carrying amount)
Loss – revaluation decrement (P/L) Dr 5 000

Machine B Cr 5 000
(Revaluation of machine from $200 000
to $155 000)
30 June 2017

(1/6 x ½ x $180 000)

(1/5 x ½ x $155 000)
Machine A $ Machine B $
Carrying amount 165 000 Carrying amount 139 500
Fair value 163 000 Fair value 136 500
Decrement 2 000 Decrement 3 000

Machine A Cr 15 000
Loss on revaluation of machinery (OCI) Dr 2 000

Machine A Cr 2 000
(Revaluation downwards)

Deferred tax liability Dr 600

(Tax-effect of revaluation decrement on asset
previously revalued upwards)
Asset revaluation surplus – Machine A Dr 1 400

Loss on revaluation of machinery (OCI)
Cr 2 000
(Reduction in accumulated equity due
to revaluation decrement)

Machine B Cr 15 500
Loss – revaluation decrement Dr 3 000

Machine B Cr 3 000
(Writing down to fair value)
B: Basis for change in accounting policy
Refer to AASB 8 paragraph 9.
Discuss the cost basis method and the fair value method in relation to the relevance and
reliability of information.
Current information is generally more relevant than past information. Determination of cost
is generally more reliable than determination of fair value.
Discuss the trade-off between relevance and reliability, that is, as information becomes less
reliable it also loses its relevance. A fair value measure may, because of its timeliness, be
more relevant but if the measure becomes more unreliable, the relevance of the information
decreases.

Question 9.6 Acquisition of assets, depreciation and change to

revaluation model
Robert Niro commenced operations on 30 March 2012 in the rubbish and recycling
industry, trading as Midnight Run Services Ltd. The end of the reporting period is 31
December, and the company depreciates all depreciable assets using the straight-line
method.
The following events occurred during 2015 and 2016:
2015
April 01 Paid $140 000 cash for a second-hand truck (Truck A). Robert
estimated the truck’s useful life and residual value at 5 years and
$20 000.
Paid $1500 cash to recondition Truck A’s engine.
June 30 Paid $32 000 cash for equipment. Robert estimated the equipment’s
useful life and residual value at 10 years and $1500.
Aug. 31 Paid $600 cash for Truck A’s transmission repairs and oil change.
Dec. 31 Recorded depreciation on Truck A and equipment.
2016
March 13 Paid $290 cash to replace a damaged bumper bar on Truck A.
Aug. 01 Traded in Truck A for a new truck (Truck B) that cost $240 000.
The dealer granted a trade-in allowance of $90 000 on the Truck A,
and the balance was paid in cash. Robert estimated Truck B’s
useful life and residual value at 7 years and $30 000.
Dec. 31 Recorded depreciation on Truck B and the equipment. Robert
decided to change the basis of measuring equipment to the
revaluation model. He assessed the equipment’s fair value at 31
December 2016 at $29 000.
Required
Prepare general journal entries to record the above events.
MIDNIGHT RUN SERVICES
01/04/15
Truck A Dr 140 000
Cash Cr 140 000
(Acquisition of Truck A)
Truck A Dr 1 500
Cash Cr 1 500
(Reconditioning of Truck A’s engine)
30/06/15
Equipment Dr 32 000
Cash Cr 32 000
31/08/15
Repairs & maintenance expense Dr 600

Cash Cr 600
(Repairs and maintenance on Truck A)
31/12/15
Depreciation – Truck A Dr 18 225
Accumulated depreciation – Truck A Cr 18 225
(Depreciation of Truck A:
9/12 x 1/5[141 500 – 20 000)
Depreciation – equipment Dr 1 525

(Depreciation of equipment:
6/12 x 1/10[32 000 – 1 500)
13/03/16
Repairs & maintenance expense Dr 290
Cash Cr 290
01/08/16
Depreciation – Truck A Dr 14 175
Accumulated depreciation – Truck A Cr 14 175
(Depreciation for year to date of sale:
7/12 x 1/5[141 500 – 20000])
01/08/16
Accumulated depreciation – Truck A
(18 225 + 14 175) Dr 32 400
Carrying amount on sale – Truck A Dr 109 100
Truck A Cr 141 500
(Carrying amount of asset sold)
01/08/16
Truck B Dr 240 000
Proceeds on sale of Truck A Cr 90 000
Cash Cr 150 000
(Acquisition of Truck B and trade-in of Truck A)
31/12/16
Depreciation – Truck B Dr 12 500
Accumulated depreciation – Truck B Cr 12,500
(Depreciation of Truck B:
5/12 x 1/7[240 000 – 30 000])
Depreciation – equipment Dr 3 050

(Depreciation of equipment:
1/10[32 000 – 1 500)
31/12/16
Accumulated depreciation – equipment

(1 525 + 3 050) Dr 4 575

Equipment Cr 4 575
(Write down to carrying amount of $27 425)
Equipment Dr 1 575
Gain on revaluation of equipment (OCI) Cr 1 575
(Recognition of revaluation increment:
27 425 to 29 000)

(Tax-effect of revaluation of equipment: 30% x 1575)
Gain on revaluation of equipment (OCI) Dr 1 575

(Accumulation of revaluation surplus in equity)

Question 9.7 Depreciation calculation
On 1 July 2016, Salt Airlines Ltd acquired a new aeroplane for a total cost of
$10 million. A breakdown of the costs to build the aeroplane was given by the
manufacturers as follows:
Aircraft body $ 3 000 000

Engines (2) 4 000 000
Fitting out of aircraft:
Seats 1 000 000
Carpets 50 000
Electrical equipment — passenger seats 200 000
— cockpit 1 500 000
Food preparation equipment 250 000
All costs include installation and labour costs associated with the relevant part.
It is expected that the aircraft will be kept for 10 years and then sold. The main value
of the aircraft at that stage is the body and the engines. The expected selling price is
$2.1 million, with the body and engines retaining proportionate value.
Costs in relation to the aircraft over the next 10 years are expected to be as follows:
• Aircraft body. This requires an inspection every 2 years for cracks and wear and tear,
at a cost of $10 000.
• Engines. Each engine has an expected life of 4 years before being sold for scrap. It is
expected that the engines will be replaced in 2020 for $4.5 million and again in 2024
for $6 million. These engines are expected to incur annual maintenance costs of
$300 000. The manufacturer has informed Salt Airlines Ltd that a new prototype
engine with an extra 10% capacity should be on the market in 2022, and that existing
engines could be upgraded at a cost of $1 million.
• Fittings. Seats are replaced every 3 years. Expected replacement costs are $1.2 million
in 2019 and $1.5 million in 2025. The repair of torn seats and faulty mechanisms is
expected to cost $100 000 p.a. Carpets are replaced every 5 years. They will be
replaced in 2021 at an expected cost of $65 000, but will not be replaced again before
the aircraft is sold in 2026. Cleaning costs amount to $10 000 p.a. The electrical
equipment (such as the TV) for each seat has an annual repair cost of $15 000. It is
expected that, with the improvements in technology, the equipment will be totally
replaced in 2022 by substantially better equipment at a cost of $350 000. The electrical
equipment in the cockpit is tested frequently at an expected annual cost of $250 000.
Major upgrades to the equipment are expected every 2 years at expected costs of
$250 000 (in 2015), $300 000 (in 2017), $345 000 (in 2019) and $410 000 (in 2024). The
upgrades will take into effect the expected changes in technology.
• Food preparation equipment. This incurs annual costs for repair and maintenance of
$20 000. The equipment is expected to be totally replaced in 2022.
Required
A. Discuss how the costs relating to the aircraft should be accounted for.
B. Determine the expenses recognised for the 2016–17 financial year.
A.
Discuss:

- the advantages of a components approach versus a simple depreciation of the $10

million dollars over the 10-year period.
- the treatment of the upgrades of cockpit equipment
- accounting for inspections
B: Expenses for the 2016-17 year:
Aircraft body:
Annual expense of $5 000 ($10 000 / 2years) for inspection for cracks
Depreciation expense = 1/10 (3 000 000 – 3/7 x $2 100 000) = $210 000
It is explained that the main value of the aircraft is the body ($3m) and engines ($4m),
a total of $7m. These two components are expected to retain their proportionate
values for when the aircraft is sold in 10 years’ time for $2.1m Therefore, the
depreciable amount for the aircraft body is adjusted by its proportionate residual
value. That is, $3m/$7m x $2.1m selling price.
Engines:
Depreciation expense = 4 000 000/4 = $1 000 000

Maintenance expense = $300 000
The depreciation calculation does not take into account the proportionate value of the
engines compared to the aircraft body. Why? The aircraft body is kept until it is
expected to be sold in 10 years’ time, whereas the engines are replaced every 4 years.
Fittings
Seats: Depreciation = 1/3 x $1 000 000 = $333 333

Annual expense = $100 000
Carpets: Depreciation = 1/5 x 50 000 = $10 000

Cleaning = $10 000
Electrical: Passenger
Depreciation = 1/6 x $200 000 = $33 333
(expected to be replaced in 2020 – 6 years from date of purchase)
Electrical: Cockpit
Depreciation = 1/10 x $1 500 000 = $150 000
Food preparation equipment:

Depreciation = 250 000/6 = $41 667

Total other expenses = $ 700 000

Annual depreciation = $1 778 333

Question 9.8 Depreciation

Max Ltd was formed on 1 July 2014 to provide delivery services for packages to be
taken between the city and the airport. On this date, the company acquired a delivery
truck from Payne Trucks. The company paid cash of $50 000 to Payne Trucks, which
included government charges of $600 and registration of $400. Insurance costs for the
first year amounted to $1200. The truck is expected to have a useful life of 5 years. At
the end of the useful life, the asset is expected to be sold for $24 000, with costs relating
to the sale amounting to $400.
The company went extremely well in its first year, and the management of Max Ltd
decided at 1 July 2015 to add another vehicle, a flat-top, to the fleet. This vehicle was
acquired from a liquidation auction at a cash price of $30 000. The vehicle needed some
repairs for the elimination of rust (cost $2300), major servicing to the engine (cost $480)
and the replacement of all tyres (cost $620). The company believed it would use the flat-
top for another 2 years and then sell it. Expected selling price was $15 000, with selling
costs estimated to be $400. On 1 July 2015, both vehicles were fitted out with a radio
communication system at a cost per vehicle of $300. This was not expected to have any
material effect on the future selling price of either vehicle. Insurance costs for the 2015–
16 period were $1200 for the first vehicle and $900 for the newly acquired vehicle.
All went well for the company except that, on 1 August 2016, the flat-top that had
been acquired at auction broke down. Max Ltd thought about acquiring a new vehicle
to replace this one but, after considering the costs, decided to repair the flat-top instead.
The vehicle was given a major overhaul at a cost of $6500. Although this was a major
expense, management believed that the company would keep the vehicle for another 2
years. The estimated selling price in 3 years’ time is $12 000, with selling costs estimated
at $300. Insurance costs for the 2016–17 period were the same as for the previous year.
Required
Prepare the journal entries for the recording of the vehicles and the depreciation of the
vehicles for each of the 3 years. The financial year ends on 30 June.
MAX LTD
2014
1/7 Vehicles Dr 50 000
Cash Cr 50 000
(Acquisition of delivery truck)
Insurance expense Dr 1 200

Cash Cr 1 200
(Truck insurance)
2015
30/6 Depreciation expense - Vehicles Dr 5 280
(Annual depreciation:
1/5 x $50 000 - $23 600)

1/7 Vehicles Dr 30 000

Cash Cr 30 000
(Acquisition of flat-top truck)
Vehicles Dr 2 920
Cash Cr 2 920
(Amounts paid on flat-top truck:
$2 300 + $620)
Servicing expense Dr 480

Cash Cr 480
(Service of flat-top truck)
Vehicles Dr 600
Cash Cr 600
(Installation of radios to trucks)
Insurance expense Dr 2 100

Cash Cr 2 100
(Insurance on trucks)
2016
30/6 Depreciation expense - Vehicles Dr 14 665
(Depreciation of vehicles:
1/5 ($50 000 - $23 600) + ¼ x $300= $5 355
½ ($32 920 + $300 – $14 600 = $9 310
1/7 Insurance expense Dr 2 100

Cash Cr 2 100
(Insurance on trucks)
1/8 Depreciation expense – Vehicles Dr 776

Accumulated depreciation Cr 776
(Depreciation on flat-top:
1/12 x ½ ($32 920 + $300 - $14 600)
Accumulated depreciation – Vehicles Dr 10 086

Vehicles Cr 10 086
(Write-down of flat-top truck to carrying
amount: $9 310 + $776)

Vehicles Dr 6 500
Cash Cr 6 500
(Overhaul of flat-top truck)
2017
30/6 Depreciation expense – Vehicles Dr 5 480
(Depreciation on vehicles:
delivery truck: $5 355 as per previous year
flat-top truck:
11/12[1/3 ($32 920 + $300 - $9 310 - $776 +$ 6 500 – ($12 000 - $300)] = $5 480)

Question 9.9 Depreciation
Sting Ltd constructed a building for use by the administration section of the company.
The completion date was 1 July 2010, and the construction cost was $840 000. The
company expected to remain in the building for the next 20 years, at which time the
building would probably have no real salvage value and have to be demolished. It is
expected that demolition costs will amount to $15 000. In December 2016, following
some severe weather in the city, the roof of the administration building was considered
to be in poor shape so the company decided to replace it. On 1 July 2017, a new roof was
installed at a cost of $220 000. The new roof was of a different material to the old roof,
which was estimated to have cost only $140 000 in the original construction, although at
the time of construction it was thought that the roof would last for the 20 years that the
company expected to use the building. Because the company had spent the money
replacing the roof, it thought that it would delay construction of a new building, thereby
extending the original life of the building from 20 years to 25 years.
Required
Discuss how you would account for the depreciation of the building and how the
replacement of the roof would affect the depreciation calculations.
If the roof were treated as a separate component of the building:
Roof: depreciation p.a. = $140 000 x 1/20 = $7 000

Rest of building: depreciation p.a. = $700 000 x 1/20 = $35 000
At 1 July 2017, the roof would have been depreciated to $91 000 (being $140,000 less
7 x $7 000). This would then be written off on replacement of the roof. The new roof
would be depreciated at $12 222, being 1/18 x $220,000 p.a. (18 years depn = 20-
7+5)
Further, the rest of the building would have a carrying amount of $455 000, being
$700 000 less 7 x $35 000. Depreciation p.a. for the next 18 years would be $25 278.
Total depreciation is then $37 500.
If the roof were not treated as a separate component:
Depreciation p.a. = 1/20 x $840 000 = $42 000
At 1 July 2017, the building would have been depreciated to a carrying amount of
$546 000, being $840 000 – 7 x $42 000. On replacement of the roof, the total
depreciable cost is $766 000, being $546 000 + $220 000. Depreciation p.a. for the
next 18 years is $42 556.

Question 9.10 Acquisition, disposal and depreciation of non-current

assets
Avatar Bricklaying Ltd commenced trading on 1 July 2015. On 8 July 2015, a brick-
cutting machine was purchased for $3500, payable in two equal instalments due on 1
August and 1 October 2015. Transport costs of $120 were paid in cash to deliver the
machine to Avatar Bricklaying Ltd’s premises. Machinery is depreciated at 20% p.a. on
the diminishing balance.
On 25 September 2015, the business purchased a second-hand truck, Truck X, for
$26 000. Stamp duty amounted to $700. The truck dealer also fitted four new tyres at a
cost of $1200 and spray painted the business logo onto the truck doors at a cost of $500.
All amounts were paid in cash. The truck was expected to have a useful life of 3 years
and a residual value of $5000.
On 1 March 2017, major repairs were carried out on the brick-cutting machine,
which affected its productive capacity at a cost of $1820, paid in cash. Avatar
Bricklaying Ltd made no change to the depreciation rate.
On 23 April 2017, Truck X was traded in on a new truck, Truck Y, costing $56 000.
An amount of $17 000 was allowed for the trade-in of Truck X and the balance paid in
cash. Truck Y was expected to have a useful life of 7 years and a residual value of
$7000.
Avatar Bricklaying Ltd depreciates trucks using the straight-line method and records
depreciation to the nearest month. The end of the reporting period is 30 June. On 30
June 2017, the business changed the basis of measuring trucks to the revaluation model.
The fair value of Truck Y at that date was $58 000.
Required
A. Prepare general journal entries (round all amounts to the nearest dollar) to record
the above transactions and to record depreciation necessary for the years ended 30
June 2016 and 2017.
B. Justify the value you recognised as the cost of the second-hand truck, Truck X,
purchased on 25 September 2015 by reference to the requirements of AASB 116.
C. Assume that on 30 June 2018 the carrying amount of the truck was $49 500 and its
fair value was $46 000. Prepare the general journal entry/entries to revalue the truck
to fair value on that date in accordance with the requirements of AASB 116.
A. General journal entries
08/07/15 Machinery (3500 + 120) Dr 3 620

Payable Cr 3 500
Cash Cr 120
(Acquisition of brick-cutting machine,
including transport costs)
01/08/15 Payable Dr 1 750

Cash Cr 1 750
(Payment of instalment of machine)
25/09/15 Truck X Dr 28 400

Cash Cr 28 400
(Acquisition of Truck X:
26 000 + 700 + 1200 + 500)
01/10/15 Payable Dr 1 750

Cash Cr 1 750
(Payment of 2nd instalment on machine)
30/06/16 Depreciation – machinery Dr 724

Accumulated depreciation – machinery Cr 724
(Depreciation of machinery: 20% x 3620)
Depreciation – Truck X Dr 5 850

Accumulated depreciation – Truck X Cr 5 850
(Depreciation of Truck X: 9/12 x 1/3[28 400 – 5 000])

(Depreciation of machinery up to date of
major repairs: 8/12 x 20% x 2 896.
CA = 2 510 = 3 620 – 724 - 386)
Machinery Dr 1,820
Cash Cr 1,820
(Repairs on machinery:
Revised CA = 2 510 + 1 820 = 4 330)
23/04/17 Depreciation – Truck X Dr 6 500

Accumulated depreciation – Truck X Cr 6 500
(Depreciation of Truck X up to time of trade-in:
10/12 x 1/3[28 400 – 5000]
Accumulated depreciation – Truck X

(5 850 + 6 500) Dr 12 350
Carrying amount of Truck X on sale Dr 16 050
Truck X Cr 28 400
(De-recognition of Truck X on sale)
Truck Y Dr 56 000
Proceeds on sale of Truck X Cr 17 000
Cash Cr 39 000
(Acquisition of Truck Y)

(Depreciation of machinery: 4/12 x 20% x 4330)
Depreciation – Truck Y Dr 1 167

Accumulated depreciation – Truck Y Cr 1 167
(Depreciation of Truck Y:

2/12 x 1/7[56 000 – 7 000

CA = 54 833)
Truck Y Dr 3 167
Gain on revaluation of Truck Y (OCI) Cr 3 167
(Revaluation of Truck Y from 54 833 to 58 000)

(Tax effect of revaluation gain on truck)
30% x 3 167)
Gain on revaluation of Truck Y (OCI) Dr 3 167

B. Justify the value recognised as the truck cost on 25/09/15
AASB 116 requires items of property, plant and equipment that quality for recognition as an
asset to be recognised at their cost.
Cost is defined as the amount of cash paid or the fair value of other consideration given to
acquire an asset at the time of its acquisition. This includes its purchase price and 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.
In the case of the truck the purchase price was $26 000 and attributable costs included the
stamp duty, new tyres and sign writing (total of $2 400). All these costs were necessary to
get the truck into the location and condition that was required for management to use the
asset. Thus, the total cost of the truck is $28 400.
C. General journal entry required on 30/06/18 to revalue the truck from ca of $49
500 to fv of $46 000
30/06/18 Accumulated depreciation – Truck Y Dr 8 500

Truck Y Cr 8 500
(Write down asset from former FV of
58 000 to its carrying amount of 49 500)
Loss on revaluation of Truck Y (OCI) Dr 3 167

Loss on revaluation of Truck Y (P/L) Dr 333
Truck Y Cr 3 500
(Revaluation downwards of truck from CA of 49 500 to FV of 46 000)

(Tax effect of revaluation decrement)
Asset revaluation surplus Dr 2 217


Loss on revaluation of Truck Y (OCI) Cr 3 167

(Reduction in equity due to revaluation decrement)

On 1 July 2016, Kingdom Ltd acquired two assets within the same class of plant and
equipment. Information on these assets is as follows:
Cost Expected useful life

Machine A $100 000 5 years
Machine B 60 000 3 years
The machines are expected to generate benefits evenly over their useful lives. The class
of plant and equipment is measured using fair value.
At 30 June 2017, information about the assets is as follows:
Fair value Expected useful life

Machine B 38 000 2 years
On 1 January 2018, Machine B was sold for $29 000 cash. On the same day, Kingdom
Ltd acquired Machine C for $80 000 cash. Machine C has an expected useful life of 4
years. Kingdom Ltd also made a bonus issue of 10 000 shares at $1 per share, using
$8000 from the general reserve and $2000 from the asset revaluation surplus created as
a result of measuring Machine A at fair value.
At 30 June 2018, information on the machines is as follows:
Fair value Expected useful life

Machine C 68 500 1.5 years
The income tax rate is 30%.
Required
Prepare the journal entries in the records of Kingdom Ltd to record the described
events over the period 1 July 2016 to 30 June 2018, assuming the ends of the
reporting periods are 30 June 2017 and 30 June 2018.
1 July 2016
Machine A Dr 100 000

Machine B Dr 60 000
Cash Cr 160 000
30 June 2017

(1/5 x $100 000)


(1/3 x $60 000)
Accumulated depreciation- Machine A Dr 20 000

Machine A Cr 20 000
Machine A Dr 4 000
Gain on revaluation of Machine A (OCI) Cr 4 000
(Revaluation increment: $80 000 to $84 000)

(Tax effect of revaluation increment)
Gain on revaluation of Machine A (OCI) Dr 4 000

Asset revaluation surplus – Machine A Cr 2 800
(Accumulation of net revaluation gain in equity))

Machine B Cr 20 000
Expense – revaluation decrement (P&L) Dr 2 000

Machine B Cr 2 000
(Revaluation to fair value at 30/6/17)
1 January 2018
Machine C Dr 80 000
Cash Cr 80 000
(Acquisition of machine C)

(($38 000 / 2years) x 1/2 year depn)
Cash Dr 29 000
Proceeds on sale of Machine B Cr 29 000
(Sale of Machine B)
Carrying amount of Machine B Sold Dr 28 500

Accumulated depreciation Dr 9 500
Machine B Cr 38 000
(Carrying amount of machine sold)
General reserve Dr 8 000

Asset revaluation surplus – Machine A Dr 2 000

Share Capital Cr 10 000
30 June 2018

(1/4 x $84 000)
Depreciation expense – Machine C Dr 10 000

(1/4 x ½ x $80 000)

Machine A Cr 21 000
Loss on revaluation of Machine A (OCI) Dr 2 000

Machine A Cr 2 000
(Write down of plant from $63000 to $61000)

(Tax-effect on downward revaluation
subsequent to upward revaluation)
*Asset revaluation surplus – Machine A Dr 800

Loss on revaluation of Machine A(P&L) Dr 600
Loss on revaluation of Machine A (OCI) Cr 2 000
(Accumulation of revaluation loss to equity)
*Note: in the previous year the value of the ARS account from a revaluation increment for
Machine A was $2 800. However, the entity used $2 000 of this surplus for a bonus share
issue, leaving $800 balance in this account. Therefore, when recognising a revaluation
decrement for Machine A the ARS account can only be reduced by the $800 remaining. The
balance of the loss on revaluation must now be recognised directly in P&L.
Accumulated depreciation – Machine C Dr 10 000

Machine C Cr 10 000
Loss on revaluation (P&L) Dr 1 500

Machine C Cr 1 500
(Revaluation to fair value at 30/6/18)

Question 9.12 Acquisition and sale of assets, depreciation
Jeremiah’s Turf Farm owned the following items of property, plant and equipment as
at 30 June 2015:
Land (at cost) $120 000

Office building (at cost) 150 000 126 625
Accumulated depreciation (23 375
)
Turf cutter (at cost) 65 000
Accumulated depreciation (42 367) 22 633
Water desalinator (at fair value) 189 000
Additional information (at 30 June 2015)

(a) The straight-line method of depreciation is used for all depreciable items of
property, plant and equipment. Depreciation is charged to the nearest month and all
figures are rounded to the nearest dollar.
(b) The office building was constructed on 1 April 2011. Its estimated useful life is 20
years and it has an estimated residual value of $40 000.
(c) The turf cutter was purchased on 21 January 2012, at which date it had an estimated
useful life of 5 years and an estimated residual value of $3200.
(d) The water desalinator was purchased and installed on 2 July 2014 at a cost of
$200 000. On 30 June 2015, the plant was revalued upwards by $7000 to its fair value
on that day. Additionally, its useful life and residual value were re-estimated to 9
years and $18 000 respectively.
The following transactions occurred during the year ended 30 June 2016:
(Note: All payments are made in cash.)
(e) On 10 August 2015, new irrigation equipment was purchased from Johnson Supplies
for $37 000. On 16 August 2015, the business paid $500 to have the equipment
delivered to the turf farm. Bob Redford was contracted to install and test the new
system. In the course of installation, pipes worth $800 were damaged and
subsequently replaced on 3 September. The irrigation system was fully operational
by 19 September and Bob Redford was paid $9600 for his services. The system has
an estimated useful life of 4 years and a residual value of $0.
(f) On 1 December 2015, the turf cutter was traded in on a new model worth $80 000. A
trade-in allowance of $19 000 was received and the balance paid in cash. The new
machine’s useful life and residual value were estimated at 6 years and $5000
respectively.
(g) On 1 January 2016, the turf farm’s owner decided to extend the office building by
adding three new offices and a meeting room. The extension work started on 2
February and was completed by 28 March at a cost of $49 000. The extension is
expected to increase the useful life of the building by 4 years and increase its residual
value by $5000.
(h) On 30 June 2016, depreciation expense for the year was recorded. The fair value of
the water desalination plant was $165 000.
Required
(Show all workings and round amounts to the nearest dollar.)
Prepare general journal entries to record the transactions and events for the
reporting period ended 30 June 2016 (narrations are not required).

General Journal Entries
DATE DETAILS Dr Cr
10/08/15 Irrigation equipment 37 000

Cash 37 000
16/08/15 Irrigation equipment 500

Cash 500
03/09/15 Repairs and maintenance expense 800

Cash 8 00
19/09/15 Irrigation equipment 9 600

Cash 9 600
01/12/15 Depreciation – Turf cutter 5 150

Accumulated depreciation – Turf cutter 5 150
(($65 000 – $3 200)/5 x 5/12 = $5 150))
01/12/15 Carrying amount – Turf cutter ($65 000 – $47 517) 17 483
($42 367 + $5 150)
Turf Cutter 65 000
01/12/15 Turf cutter 80 000

Cash 61 000
Proceeds on sale – Turf cutter 19 000
28/03/16 Depreciation - Building 4 125

Accumulated depreciation - Building 4 125
($150 000 – $40 000/20 x 9/12 = $4 125)
28/03/16 Accumulated depreciation – Building 27 500

($23 375 + $4 125) 27 500
Office building
28/03/16 Office building 49 000

Cash 49 000
30/06/16 Depreciation expense – Turf cutter 7 292

($80 000 – $5 000/6 x 7/12 = $7 292)

30/06/16 Depreciation expense – Water desalinator 19 000

Accumulated depreciation – Water desalinator 19 000
($189 000 – $18 000/9 = $19 000)
30/06/16 Depreciation expense – Irrigation equipment 8 831

Accumulated depreciation – Irrigation equipment 8 831
($47 100 – 0/4 x 9/12 = $8 831)
30/06/16 Depreciation expense – Building 1 665

Accumulated depreciation - Building 1 665
($150 000 – $27 500 + $49 000 = $171 500
$171 500 – [$40 000 + $5 000)/{20 -5 + 4} = $6 658 p.a.
$6 658 x 3/12 = $1 665)
30/06/16 Accumulated depreciation – Water desalinator 19 000

Water desalinator 19 000
Loss on revaluation of desalinator (OCI) 5000

Water desalinator 5 000
(Revaluation downwards from carrying amount of $170 000
(being $189 000 - $19 000) to fair value of $165 000)
Deferred tax liability 1500

Income tax expense (OCI) 1500
(Tax-effect of revaluation decrement subsequent to previous
increment)
3500
Asset revaluation surplus 1 500
Loss on revaluation of desalinator (OCI)
(Reduction in accumulated equity due to revaluation
decrement on land)

Question 9.13 Acquisitions, disposals, depreciation
Jumper Ltd purchased equipment on 1 July 2016 for $39 800 cash. Transport and
installation costs of $4200 were paid on 5 July 2016. Useful life and residual value were
estimated to be 10 years and $1800 respectively. Mandurah Ltd depreciates equipment
using the straight-line method to the nearest month, and reports annually on 30 June.
The company tax rate is 30%.
In June 2018, changes in technology caused the company to revise the estimated total
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 financial year ended 30
June 2018.
On 30 June 2018, 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.
On 30 June 2019, depreciation for the year was charged and the equipment’s carrying
amount was remeasured to its fair value of $16 000.
On 30 September 2019, the equipment was sold for $8400 cash.
Required
(Show all workings and round amounts to the nearest dollar.)
Prepare general journal entries to record the transactions and events for the period
1 July 2016 to 30 September 2019.
General journal entries
DATE Dr Cr
DETAILS
2016
1 July Equipment 39 800
Cash 39 800
5 July Equipment 4 200

Cash 4 200
2017
30 June Depreciation – Equipment 4 220
Accumulated depreciation - Equipment 4 220
($44 000 – $1 800/10 = $4 220)
2018
($44 000 – $1 200/4 = $8 560 + prospective adjustment
for change in estimates [$8 560 – 4 220] = $4 340)
30 June Accumulated depreciation – Equipment 17 120

Equipment 17 120
(Write down to carrying amount)
Equipment 3 120
Gain on revaluation of equipment (OCI) 3 120

(Fair value $30 000; Carrying amount $26 880;

Revaluation increase $3 120)

(Tax-effect of revaluation increment)
Gain on revaluation of equipment (OCI) 3 120

Asset revaluation surplus 2184
(Transfer to accumulated equity subsequent to
revaluation of asset)
2019
Accumulated depreciation – Equipment 9 600
($30 000 – $1 200/3 = $9 600)
30 June Accumulated depreciation – Equipment 9 600

Equipment 9 600
(Write down to carrying amount)
Loss on revaluation of plant (OCI) 3 120

Loss on revaluation of plant (P&L) 1 280
Equipment 4 400
(Fair value $16 000; Carrying amount $20 400;
Revaluation decrease $4 400)

(Tax effect on decrement relating to prior increment)
Asset revaluation surplus 2 184

Loss on revaluation of plant (OCI) 3 120
(Reduction in accumulated equity due to devaluation of
plant)
2019
30 Sept Depreciation expense – Equipment 1 850
(3/12[$16 000 – $1 200/2])
Accumulated depreciation – Equipment 1 850

Carrying amount of Equipment 14 150
Equipment 16 000
Cash 8 400

Proceeds on sale – Equipment 8 400

Question 9.14 Acquisitions, disposals, trade-ins, overhauls, depreciation
Matty Damon is the owner of Bourne’s Beaut Boats. The company’s final trial balance
on 30 June 2017 (end of the reporting period) included the following balances:
Processing Plant (at cost, purchased 4 April 2015) $148 650

Accumulated Depreciation – Processing Plant (81 274)
Charter Boats 291 200

Accumulated Depreciation – Boats (188 330)
The following boats were owned at 30 June 2017:
Estimated useful Estimated

Boat Purchase date Cost life residual value
1 23 February 2013 $62 000 5 years $3 000
2 9 September 2013 $66 400 5 years $3 400
3 6 February 2014 $78 600 4 years $3 600
4 20 April 2015 $84 200 6 years $3 800
Additional information
Bourne’s Beaut Boats calculates depreciation to the nearest month using straight-line
depreciation for all assets except the processing plant, which is depreciated at 30% on
the diminishing balance method. Amounts are recorded to the nearest dollar.
Part A
The following transactions and events occurred during the year ended 30 June 2018:
2017
July 26 Traded in Boat 1 for a new boat (Boat 5) which cost $84 100. A trade-
in allowance of $8900 was received and the balance was paid in cash.
Registration and stamp duty costs of $1500 were also paid in cash.
Matty Damon estimated Boat 5’s useful life and residual value at 6
years and $4120 respectively.
Dec. 4 Overhauled the processing plant at a cash cost of $62 660. As the
modernisation significantly expanded the plant’s operating capacity
and efficiency, Matty Damon decided to revise the depreciation rate to
25%.
2018
Feb. 6 Boat 3 reached the end of its useful life but no buyer could be found,
so the boat was scrapped.
June 30 Recorded depreciation.
Required
Prepare general journal entries (narrations are required) to record the transactions and
events for the year ended 30 June 2018.
Part B
On 26 March, Matty Damon was offered fish-finding equipment with a fair value of
$9500 in exchange for Boat 2. The fish-finding equipment originally cost its owner
$26 600 and had a carrying value of $9350 at the date of offer. The fair value of Boat 2

was $9100.
Required
If Matty Damon accepts the exchange offer, what amount would the business use to
record the acquisition of the fish-finding equipment? Why? Justify your answer by
reference to the requirements of AASB 116 relating to the initial recognition of a
property, plant and equipment item.
Part A.
General journal entries
DETAILS
DATE Dr Cr
26/07/17 Depreciation – boats 983
Accumulated depreciation – boats 983
(Depreciation of boat 1 to date of sale:
1/12 x 1/5 [$62 000 – 3000])
Accumulated depreciation - boats 52 117

Carrying amount of boat sold 9 883
(Derecognition of boat 1 on sale:
$11 800 x 53/12 = $52 117)

Proceeds on sale of boat 8 900
Cash 76 700
(Purchase of boat 5 and trade in of boat 1)
04/12/17 Depreciation – processing plant 8 422

Accumulated depreciation – processing plant 8 422
(Depreciation to date of overhaul:
[$148 650 – 81 274] x 30% x 5/12)

Processing plant 89 696
(Write down to carrying amount prior to overhaul)
Processing plant 62 660

Cash 62 660
(Overhaul of plant)
(New depreciable amount :
= $148 650 + $62 660 – $89 696
= $121 614)
06/02/18 Depreciation - boats 10 937

Accumulated depreciation – boats 10 937
(Depreciation to date of scrapping:
$78 600 – $3 600/4 x 7/12 = $10 937)


Carrying amount of boat scrapped 3 600
(Derecognition of boat 3 at the end of its useful life:
($78 600 - $3 600)/4 x 48/12
DATE DETAILS Dr Cr
30/06/18 Depreciation – boats 38 448

(Depreciation charge for the year:
Boat 2: ($66 400 – $3 400)/ 5 = $12 600
Boat 4: ($84 200 – $3 800)/6 = $13 400
Boat 5: ($85 600 – $4 120)/6 x 11/12 = $12 448)
Depreciation – processing plant 17 735

(Depreciation charge for the year:
$121 614 x 25% x 7/12)
Part B
AASB 116 requires property, plant and equipment items to be initially recognised at cost.
Cost is further defined as the ‘amount of cash or cash equivalents paid or the fair value of the
other consideration given to acquire an asset at the time of its acquisition or construction’. In
this situation, the fish finder is acquired by exchange – no cash is paid – hence, the ‘cost’ of
the asset will be measured by reference to the fair value of the consideration given in
exchange, that is, boat 2. Thus, the fish finder would be recognised at a cost of $9 100 this
being the fair value of boat 2.

Question 9.15 Classification of acquisition costs

Nikita Ltd began operations on 1 July 2016. During the following year, the company
acquired a tract of land, demolished the building on the land and built a new factory.
Equipment was acquired for the factory and, in March 2017, the factory was ready. A
gala opening was held on 18 March, with the local parliamentarian opening the factory.
The first items were ready for sale on 25 March.
During this period, the following inflows and outflows occurred:
1. While searching for a suitable block of land, Nikita Ltd placed an

option to buy with three real estate agents at a cost of $100 each. One
of these blocks of land was later acquired.
2. Payment of option fees $300
3. Receipt of loan from bank 400 000
4. Payment to settlement agent for title search, stamp duties and 10 000
settlement fees
5. Payment of arrears in rates on building on land 5 000
6. Payment for land 100 000
7. Payment for demolition of current building on land 12 000
8. Proceeds from sale of material from old building 5 500
9. Payment to architect 23 000
10. Payment to council for approval of building construction 12 000
11. Payment for safety fence around construction site 3 400
12. Payment to construction contractor for factory building 240 000
13. Payment for external driveways, parking bays and safety lighting 54 000
14. Payment of interest on loan 40 000
15. Payment for safety inspection on building 3 000
16. Payment for equipment 64 000
17. Payment of freight and insurance costs on delivery of equipment 5 600
18. Payment of installation costs on equipment 12 000
19. Payment for safety fence surrounding equipment 11 000
20. Payment for removal of safety fence 2 000
21. Payment for new fence surrounding the factory 8 000
22. Payment for advertisements in the local paper about the forthcoming
factory and its benefits to the local community 500
23. Payment for opening ceremony 6 000
24. Payments to adjust equipment to more efficient operating levels
subsequent to initial operation 3 300
Required
Using the information provided, determine what assets Nikita Ltd should recognise and
the amounts at which they would be recorded.
Land: Option cost $100

Settlement agent 10 000
Rates 5 000
Land 100 000
Demolition of old building 12 000
Proceeds on sale of material (5 500)
$121 600

Building Architects $23 000

Council 12 000
Fence 3 400
Building 240 000
Safety inspection 3 000
Removal of safety fence 2 000
$283 400
Improvements: Driveway et al $54 000

New fence 8 000
$62 000
Equipment: Cost $64 000

Freight & Insurance 5 600
Installation 12 000
Safety equipment 11 000
Adjustments 3 300
$95 900
Options on land not acquired: expense $200

Interest: $40 000 must be capitalised if relates to a qualifying asset; otherwise it is expensed.
The only possible qualifying asset is the factory. In this example, it may be necessary to
apportion the interest, depending on what loan was used for – see AASB 123 Borrowing
Costs.
Advertising: expense $500
Opening ceremony: expense $6 000

Question 9.16 Cost of acquisition

Bad Boys Ltd started business early in 2015. During its first 9 months, Bad Boys Ltd
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 2015. The company’s accountant, who was not sure how to record some of the
transactions, opened a Property ledger account and recorded debits and (credits) to this
account as follows.
1. Cost of real estate purchased as a building site $ 170 000

2. Paid architect’s fee for design of new building 23 000
3. Paid for demolition of old building on building site purchased in (1) 28 000
4. Paid land tax on the real estate purchased as a building site in (1) 1 700
5. Paid excavation costs for the new building 15 000
6. Made the first payment to the building contractor 250 000
7. Paid for equipment to be installed in the new building 148 000
8. Received from sale of salvaged materials from demolishing the old (6 800)
building
9. Made final payment to the building contractor 350 000
10. Paid interest on building loan during construction 22 000
11. Paid freight on equipment purchased 1 900
12. Paid installation costs of equipment 4 200
13. Paid for repair of equipment damaged during installation 2 700
Property ledger account balance $ 1 009 700
Required
A. Prepare a schedule with the following column headings. Analyse each transaction,
enter the payment or receipt in the appropriate column, and total each column.
Land Manufacturing
Item no. Land improvements Building equipment Other
B. Prepare the journal entry to close the $1 009 700 balance of the Property ledger
account.
A.
Item Land Land Building Manufacturing Other

Improvements Equipment
1. 170 000
2. 23 000
3. 28 000
4. 1 700
5. 15 000
6. 250 000
7. 148 000
8. (6 800)
9. 350 000
10. 22 000
11. 1 900
12. 4 200
13. 2 700

TOTAL 192 900 - 660 000 154 100 2 700
B. Journal entry:
Land Dr 192 900

Buildings Dr 660 000
Manufacturing equipment Dr 154 100
Repairs expense Dr 2 700
Property Cr 1 009 700
(Cost of acquisition reallocated)

Question 9.17 Acquisition, disposal and depreciation of assets

Robot Manufacturing Ltd’s post-closing trial balance at 30 June 2016 included the
following balances:
Machinery Control (at cost) $244 480

Accumulated Depreciation – Machinery Control 113 800
Fixtures (at cost) 308 600
Accumulated Depreciation – Fixtures 134 138
The Machinery Control and Accumulated Depreciation – Machinery Control

accounts are supported by subsidiary ledgers. Details of machines owned at 30 June
2016 are as follows:
Machine Purchase Cost Estimated Estimated

date useful Life residual value
1 28 Apr 2012 $74 600 5 years $3 800
2 04 Feb 2014 $82 400 5 years $4 400
3 26 Mar 2015 $87 480 6 years $5 400
 Robot Manufacturing Ltd uses the general journal for all journal entries, records
depreciation to the nearest month, balances its accounts 6-monthly, and records
amounts to the nearest dollar.
 Robot Manufacturing Ltd uses straight-line depreciation for machinery and
diminishing balance depreciation at 20% p.a. for fixtures.
The following transactions and events occurred from 1 July 2016 onwards:
2016
03 July Exchanged items of fixtures (cost: $100 600; carrying amount at exchange date:
$56 872; fair value at exchange date: $57 140) for a used machine (Machine 4).
Machine 4’s fair value at exchange date was $58 000. Machine 4 originally cost
$92 660 and had been depreciated by $31 790 to exchange date in the previous
owner’s accounts. Robot Manufacturing Ltd estimated Machine 4’s useful life
and residual value at 3 years and $4580.
10 Oct Traded in Machine 2 for a new machine (Machine 5), that cost $90 740. A
trade-in allowance of $40 200 was received and the balance was paid in cash.
Freight charges of $280 and installation costs of $1600 were also paid in cash.
Robot Manufacturing Ltd estimated Machine 5’s useful life and residual value
at 6 years and $5500.
2017
24 Apr Overhauled Machine 3 at a cash cost of $16 910, after which Robot
Manufacturing Ltd revised its residual value to $5600 and extended its
estimated useful life by 2 years.
16 May Paid for scheduled repairs and maintenance on the machines of $2 370.
30 June Recorded depreciation and scrapped Machine 1.
Required
A. Prepare journal entries to record the above transactions and events. (Narrations are
not required.)

B. Prepare the Accumulated Depreciation Control – Machinery and Accumulated

Depreciation – Fixtures ledger accounts for the period 1 July 2016 to 30 June 2017.
1. JOURNAL ENTRIES
 M1 depreciation = [74 600 – 3 800]/60 = 1 180 per month

03/07/16 Accumulated depreciation – fixtures

(100 600 – 56 872) Dr 43 728
Carrying amount of asset sold – fixtures Dr 56 872
Fixtures Cr 100 600
(De-recognition of asset sold)
Machinery (M4) Dr 57 140

Proceeds on sale of asset – fixtures Cr 57 140
(Sale of asset and recognition of asset acquired)
M4 depreciation = [57 140 – 4 580]/36 = 1 460 per month
10/10/16 Depreciation – machinery (M2) Dr 3 900

Accumulated depreciation – machinery (M2) Cr 3 900
(Depreciation of M2 up to date of trade-in:
3 months x 1300)
Accumulated depreciation – Machinery (M2)

(1 300 x 32 months) Dr 41 600
Carrying amount of machinery sold (M2)
(82 400 – 41 600) Dr 40 800
Machinery (M2) Cr 82 400
(De-recognition of asset sold)

Proceeds on sale of machinery – (M2) Cr 40 200
Cash Cr 52 420
(Acquisition of new machinery (M5):
90 740 + 280 + 1600)
M5 depreciation = [92 620 – 5 500]/72 = 1 210 per month
24/04/17 Depreciation – Machinery (M3) Dr 11 400

Accumulated depreciation – Machinery (M3) Cr 11 400
(Depreciation on M3 up to point of overhaul:
1 140 x 10 months)
Accumulated Depreciation - machinery (M3) Dr 28 500

(write down to carrying amount prior to overhaul)
[$1 140 x 25 months]


Cash Cr 16 910
(Cost of overhaul)
M3: new depreciable amount = 87 480 – (1 140 x 25mths) + 16 910 – 5,600

= 70 290
new useful life = 72–25+24
= 71 months
revised depreciation = 70 290/71
= 990 per month
16/05/17 Repairs and maintenance expense Dr 2 370

Cash Cr 2 370
(Repairs and maintenance expense)
30/06/17 Depreciation expense– machinery Dr 42 190

Accumulated depreciation – machinery Cr 42 190
(Depreciation charge up to end of year:
M1: 1 180 x 10 months = 11 800
M3: 990 x 2 months = 1 980
M4: 1 460 x 12 months = 17 520
M5: 1 210 x 9 months = 10 890)
Depreciation – fixtures Dr 23 518

Accumulated depreciation – fixtures Cr 23 518
(Depreciation charge up to year end:
Cost: 308 600 – 100 600 = 208,000)
Accumulated depreciation = 134 138 – 43 728
= 90 410
Depreciable amount = 117,590
Depreciation charge = 117 590 x 20%
= 23 518)
Accumulated depreciation – machinery (M1)

(1 180 x 60 months) Dr 70 800
Carrying amount of machinery scrapped (M1)
(74 600 – 70 800) Dr 3 800
(De-recognition of machinery scrapped – M1)

2. LEDGER ACCOUNTS
ACCUMULATED DEPRECIATION CONTROL - MACHINERY

10/10/16 Machinery (M2) 41 600 30/06/16 Balance b/d 113 800
31/12/16 Balance c/d 76 100 10/10/16 Depreciation (M2) 3 900
117 700 117 700
24/04/17 Machinery (M3) 28 500 31/12/16 Balance b/d 76 100
30/06/17 Machinery (M1) 70 800 24/04/17 Depreciation (M3) 11 400
Balance c/d 30 390 30/06/17 Depreciation 42 190

129 690 129 690
ACCUMULATED DEPRECIATION - FIXTURES

03/07/016 Fixtures 43 728 30/06/16 Balance b/d 134 138
31/12/16 Balance c/d 90 410 ______
134 138 134 138
31/12/16 Balance b/d 90 410
30/06/17 Fixtures 113 928 30/06/17 Depreciation 23 518
113 928 113 928

Question 9.18 Acquisition, disposal and depreciation of non-current

assets
Bruce is the owner of Willis Meat Supplies. Willis Meat Supplies’ adjusted trial balance
at 31 December 2016 (end of the reporting period) included the following balances:
Processing Plant (at cost; purchased 10 April 2013) $148 650

Accumulated Depreciation – Processing Plant 109 135
Trucks Control (at cost) 291 400
Accumulated Depreciation Control – Trucks 174 200
The Trucks Control and Accumulated Depreciation Control – Trucks accounts are
supported by subsidiary ledgers. Details of trucks owned at 31 December 2016 are as
follows:
Truck Purchase Cost Estimated Estimated

Date Useful Life Residual Value
1 25 August 2013 $61 000 4 years $3 400
2 05 March 2014 $70 600 4 years $3 400
3 02 August 2014 $75 600 4 years $3 600
4 23 October 2014 $84 200 5 years $3 200
 Bruce uses the general journal for all entries, calculates depreciation to the nearest
month, balances his accounts 6-monthly, and records amounts to the nearest dollar.
 Bruce uses straight-line depreciation for all depreciable assets except the processing
plant, which is depreciated at 30% p.a. on the diminishing balance.
The following transactions and events occurred during 2017:
January 27 Traded-in Truck 1 for a new truck (Truck 1A) which cost $84 100. A
trade-in allowance of $10 200 was received and the balance was paid in
cash. Registration and painting costs of $1500 were also paid in cash.
Bruce estimated Truck 1A’s useful life and residual value at 5 years
and $4600.
June 02 Modernised the processing plant at a cash cost of $61 574. Although the
modernisation significantly expanded the plant’s operating capability
and efficiency, Bruce decided that no revision to the depreciation rate
was warranted.
July 24 Sold Truck 3 for $25 000 in cash.
September 28 Exchanged Truck 2 (fair value at exchange date: $10 640) for computer
equipment. The computer equipment’s fair value was $10 550 at
exchange date. The computer equipment originally cost $26 600 and
had been depreciated in the previous owner’s accounts by $15 850 to
date of exchange. Bruce estimated the computer equipment’s useful life
and residual value at 4 years and $320.
December 31 Recorded depreciation.
Required
A. Prepare journal entries to record the above transactions and events. (Narrations are
not required.)
B. Prepare the Processing Plant and Accumulated Depreciation Control – Trucks

general ledger accounts for the period 1 January 2017 to 31 December 2017:
1. JOURNAL ENTRIES
Depreciation of trucks:
 Truck 1: [61 000 – 3 400]/4y = 14 400 p.a. or 1 200/m
 Truck 2: [70 600 – 3 400]/4y = 16 800 p.a. or 1 400/m
 Truck 3: [75 600 – 3 600]/4y = 18 000 p.a. or 1 500/m
 Truck 4: [84 200 – 3 200]/5y = 16 200 p.a. or 1 350/m
27/01/17 Depreciation – trucks (T1) Dr 1 200

Accumulated depreciation – trucks (T1) Cr 1 200
(Depreciation up to point of trade-in:
1 200 x 1 month)
Accumulated depreciation – trucks (T1)

(1 200 x 41 months) Dr 49 200
Carrying amount of truck sold – trucks (T1)
(61 000 – 49 200) Dr 11 800
Trucks (T1) Cr 61 000
(De-recognition of Truck T1 on sale)
Trucks (T1A) (84 100 + 1 500) Dr 85 600

Proceeds on sale– Trucks (T1) Cr 10 200
Cash Cr 75 400
(Purchase of truck T1A)
Depreciation of T1A = [85 600 – 4 600]/60 = 1 350 per month
02/06/17 Depreciation – processing plant Dr 4 939

Accumulated depreciation – processing plant Cr 4 939
(Depreciation up to point of modernisation:
([148 650 – 109 135] x 30% x 5/12)
Accumulated depreciation – processing plant Dr 114 074

Processing Plant Cr 114 074
(writedown to carrying amount prior to modernisation:
[109 135 + 4 939])
Processing plant Dr 61 574

Cash Cr 61 574
(Cost of modernisation of processing plant)
Carrying amount of processing plant = 148 650 – (109 135 + 4 939) + 61 574
= 96 150

Accumulated depreciation – trucks Cr 10 500

(Depreciation of T3 up to sale: 1 500 x 7 months)

(1 500 x 36 months) Dr 54 000
Carrying amount of truck sold – trucks (T3)
(75 600 – 54 000) Dr 21 600
Trucks (T3) Cr 75 600
De-recognition of truck (T3) sold)
Cash Dr 25 000
Proceeds on sale of trucks (T3) Cr 25 000
(Proceeds on sale of truck T3)

Accumulated depreciation – trucks (T2) Cr 12 600
(Depreciation up to point of exchange: 1 400 x 9m)

(1 400 x 43m) Dr 60 200
Carrying amount of truck sold – (T2)
(70 600 – 60 200) Dr 10 400
Trucks (T2) Cr 70,600
(De-recognition of truck sold - T2)
28/09/17 Computer equipment Dr 10 640

Proceeds on sale of trucks (T2) Cr 10 640
(Acquisition of computer equipment at cost)
Computer equipment depreciation = [10,640 – 320]/48 = 215 per month)
31/12/17 Depreciation – trucks

(T1A = 1 350 x 11m) + (T4 = 1 350 x 12m) Dr 31 050
Depreciation – processing plant
(96 150 x 30% x 7/12) Dr 16 826
Depreciation – computer equipment (215 x 3m) Dr 645
Accumulated depreciation – trucks Cr 31,050
Accumulated depreciation – processing plant Cr 16,826
Accumulated depreciation – computer
equipment Cr 645
(Depreciation of non-current assets at year end)
2. LEDGER ACCOUNTS
PROCESSING PLANT
31/12/16 Balance b/d 148 650 02/06/17 Acc. depreciation 114 074
02/06/17 Cash 61 574 30/06/17 Balance c/d 96 150
210 224 210 224
30/06/17 Balance b/d 96 150

______ 31/12/17 Balance c/d 96 150

96 150 96 150
31/12/17 Balance b/d 96 150
ACCUMULATED DEPRECIATION CONTROL - TRUCKS

22/01/17 Trucks (T1) 49 200 31/12/016 Balance b/d 174 200
30/06/17 Balance c/d 126 200 22/01/17 Depreciation (T1) 1 200
175 400 175 400
24/07/17 Trucks (T3) 54 000 30/06/17 Balance b/d 126 200
21/09/17 Trucks (T2) 60 200 24/07/17 Depreciation (T3) 10 500
31/12/17 Balance c/d 66 150 21/09/17 Depreciation (T2) 12 600
______ 31/12/17 Depreciation 31 050
180 350 180 350
31/12/17 Balance b/d 66 150

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Solutions Manual

Company Accounting 10e

© John Wiley & Sons Australia, Ltd 2015

Chapter 9 - Property, plant and equipment

1. What assets constitute property, plant and equipment?

Para 6 of AASB 116 defines PPE as follows:

Property, plant and equipment are tangible items that:

Para 7 of AASB 116 contains the following recognition criteria:

Para 15 of AASB 116 requires the initial measurement to be at cost.

4. How is cost determined?

© John Wiley and Sons Australia, Ltd 2015 9.1

5. What choices of measurement model exist subsequent to assets being initially

Para 29 of AASB 116 states:

6. What factors should entities consider in choosing alternative measurement

Relevance of information provided: generally current information is preferred to past

7. What is meant by ‘depreciation expense’?

Para 6 of AASB 116 defines depreciation as:

8. How is useful life determined?

Para 6 of AASB 116 states:

Useful life is:

Paras 56-57 state:

© John Wiley and Sons Australia, Ltd 2015 9.2

9. What is meant by ‘residual value’ of an asset?

Para 6 of AASB 116 states:

Para 60 of AASB 116 states:

© John Wiley and Sons Australia, Ltd 2015 9.3

11. What is meant by ‘components depreciation’?

Note paras 43-47 of AASB 116:

Para 39 of AASB 116 states:

If an asset's carrying amount is increased as a result of a revaluation, the increase shall

Para 40 of AASB 116 states:

If an asset's carrying amount is decreased as a result of a revaluation, the decrease

© John Wiley and Sons Australia, Ltd 2015 9.4

Para 42 of AASB 116 states:

Paras 36-38 of AASB 116 state:

16. What differences occur between asset-by-asset or class-of-asset bases in accounting

© John Wiley and Sons Australia, Ltd 2015 9.5

17. When should property, plant and equipment be derecognised?

Para 67 of AASB 116 states:

© John Wiley and Sons Australia, Ltd 2015 9.6

CASE STUDY QUESTIONS

Case study 1 Fair value basis for measurement

Case study 2 Straight-line vs diminishing balance depreciation

Case study 3 Annual depreciation charge

© John Wiley and Sons Australia, Ltd 2015 9.7

Case study 4 Decline in value of assets

It could be argued that there are 2 concepts of depreciation, namely:

© John Wiley and Sons Australia, Ltd 2015 9.8

Case study 5 Depreciation charges

These parts of the factory will attract high depreciation charges.

The depreciation charge per annum can then be reduced.

Case study 6 Depreciation charges

Two key mistakes are being made by management:

Re (i): depreciation is an allocation of the depreciable amount of an asset. The depreciable

© John Wiley and Sons Australia, Ltd 2015 9.9

revaluation model, an asset can be carried at fair value.

Case study 7 Building costs

See paragraph 16 of AASB 116

© John Wiley and Sons Australia, Ltd 2015 9.10

Case study 8 Capitalisation

See paragraph 16 of AASB 116.

Case study 9 Expensing of costs

© John Wiley and Sons Australia, Ltd 2015 9.11