ACCT10002: Tutorial 6 In-class Exercises SUGGESTED SOLUTIONS

Question 1. (E 8.1) Sunny Ltd

(a) The following points explain the application of the cost principle in determining the
acquisition cost of PPE assets.

AASB116, paragraphs:
11 Items of property, plant and equipment may be acquired for safety or environmental reasons. The
acquisition of such property, plant and equipment, although not directly increasing the future
economic benefits of any particular existing item of property, plant and equipment, may be
necessary for an entity to obtain the future economic benefits from its other assets. Such items
of property, plant and equipment qualify for recognition as assets because they enable an
entity to derive future economic benefits from related assets in excess of what could be
derived had those items not been acquired. For example, a chemical manufacturer may install
new chemical handling processes to comply with environmental requirements for the
production and storage of dangerous chemicals; related plant enhancements are recognised as
an asset because without them the entity is unable to manufacture and sell chemicals.
However, the resulting carrying amount of such an asset and related assets is reviewed for
impairment in accordance with AASB 136 Impairment of Assets.

16 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 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.

17 Examples of directly attributable costs are: (a) costs of employee benefits (as defined in AASB
119 Employee Benefits) arising directly from the construction or acquisition of the item of
property, plant and equipment; (b) costs of site preparation; (c) initial delivery and handling
costs; (d) installation and assembly costs; (e) costs of testing whether the asset is functioning
properly, after deducting the net proceeds from selling any items produced while bringing the
asset to that location and condition (such as samples produced when testing equipment); and
(f) professional fees.

19 Examples of costs that are not costs of an item of property, plant and equipment are: (a) costs of
opening a new facility; (b) costs of introducing a new product or service (including costs of
advertising and promotional activities); (c) costs of conducting business in a new location or
with a new class of customer (including costs of staff training); and (d) administration and
other general overhead costs.

1. Under the cost principle, the acquisition cost for a PPE asset includes all expenditures
necessary to acquire the asset and make it ready for its intended use.

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions
 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by
the purchaser, insurance costs during transit, and installation costs.

3. Cost consists of the fair value* of all expenditures necessary to acquire the asset and make it
ready for its intended use.

4. *Fair value is the price that would be received to sell an asset or paid to transfer a liability in
an orderly transaction between market participants at the measurement date.

(b)
No. Account Reason
1 Land Land tax owing on the land that has been purchased is included in
the cost so that the land can be readied for use.
2 Delivery Truck The air conditioning may be capitalised as it may be required for
the operating efficiency of the new truck and contribute to
economic benefits for the entity.
3 Land Improvements Parking lots and driveways on newly acquired land are recorded
under Land Improvements as the costs will be subject to
depreciation. The asset will last for a number of years and will
contribute to economic benefits.
4 Prepaid Insurance Recorded as an asset and subsequently allocated to accounting
periods. The asset will convert to an expense according to the
accounting period.
5 Delivery truck The advertising slogan may be capitalised as it is expected to
contribute to providing economic benefits for the entity.
6 Factory Machinery Installation costs are capitalised as they are a cost required to put
the machinery into a stage when they can produce economic
benefits.
7 Motor Vehicle Expense Recorded as an asset (Prepayment) and subsequently allocated to
accounting periods. The asset will convert to an expense
according to the accounting period.
Page 481 ed 5 of Textbook and Page 505 ed 6 state that
registration of a new vehicle may be regarded as an expense as
the registration will expire in 12 months’ time and is a recurring
cost. However, consider the definition of an asset and
consistency with annual insurance treatment.
8 Factory Machinery Insurance for the safe delivery of a new item of machinery is a
cost that is capitalised as it is required to enable the machinery to
be put in a position that so that it can be readied to produce
economic benefits.

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions
Question 2. (PSA 8.1)
Cameron Ltd

Item Land Building Other Accounts

1 $180,000 70,000
2 $4,900 Land Improvements (A)
3 27,000
4 7,270
5 $21,900
6 51,000
7 629,500
8 31,800 Land Improvements (A)
9 5,320 Land Tax Expense
10 (12,700)
$201,570 $772,400 $42,020

Question 3. (E 8.2)
Tops Ltd

Cost of new machine $228,000 - purchased 1 October 2015

Balance date 31 December
Estimated residual $28,000
Depreciable amount = Cost less Residual = $228,000 - $28,000 = $200,000

(a) Straight line depreciation rate = 100% ÷ 10 years = 10% (i.e.$200,000/10)

2015 Depreciation expense = Depreciable amount x dep’n rate x 3 months

= $200,000 x 10% x 3/12
= $5,000

2016 Depreciation expense = Depreciable amount x dep’n rate

= $200,000 x 10%
= $20,000

(b) Diminishing-balance method: Straight line rate doubled (given in question)

10% x 2 = 20%

2015 depreciation = $228,000 x 20% x 3/12 = $11,400

Carrying value January 1, 2016 = $228,000 - $11,400 = $216,600

Remember the Diminishing-balance method applies the rate to the carrying value not the
depreciable amount.

2016 Depreciation expense = $216,600 x 20% = $43,320

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions
 (c) Units-of-production method:
Depreciation cost per unit = Depreciable amount ÷ Total units of production
= $200,000 ÷ 40,000 hours
= $5.00 per hour

2015 depreciation = 1,800 hours x $5.00 = $9,000.

Summary:
Straight Diminishing Units of
Years Line Balance Production
2015 $5,000 $11,400 $9,000
2016 $20,000 $43,320 -

Question 4. (PSA 8.4)

Jupiter Ltd

Year ending 30 June 2016

(a) $ $
1/7/15 Land 400,000
Buildings 250,000
Cash/Payables 650,000

1/10/15 Machinery 120,000

Cash/Payables 120,000
(b)
30/6/16 Depreciation Expense 55,700
Accumulated Depreciation – Building 12,500
Accumulated Depreciation – Machinery 43,200
(Depreciation Building $250,000 ÷ 20 = $12,500)
(Depreciation Machinery)

Rate =
= 1 - .5233
= 48% (approximately)*
Dep’n 30/06/13= $120,000 x 48% x 9/12 =$43,200

*NOTE: The above formula is NOT examinable

(c)
31/12/16 Depreciation Expense 18,432
Accumulated Depreciation - Machinery 18,432
[($120,000 - $43,200) x 48% x 6/12]

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions
 Cost of Machinery $120,000
Accumulated Dep’n ($43,200 + $18,432) (61,632)
Carrying amount at date of sale 58,368
Proceeds 50,000
Loss on disposal $8,368

31/12/16 Cash 50,000

Accumulated Depreciation – Machinery 61,632
Loss on Disposal 8,368
Machinery 120,000

The use of T accounts and sale of asset account to show the effect of the journal entries is
encouraged to visually follow the debit/credit process.

Ledgers for Question 4:

Machinery (Asset) Accum Depreciation - Machinery

1/10/15 Cash 120 000 30/ 6/16 Dep 43 200
Exp
31/12/16 31/12/16 31/12/16 Dep 18 432
Sale of Asset 120 Sale Asset 61 632 Exp
A/C 000 A/C
0 0 61 632 61 632

Sale of Asset Summary Account

31/12 Machinery 120 000 31/12 Accum Depreciation 61 632
31/12 Cash 50 000
31/12 Loss on Disposal (P&L) 8 368

Cash P&L Summary Account

31/12/16 31/12/16
Sale of Asset 50 000 Loss on 8 368
A/C Disposal

Question 5. (E8.5)

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions
AASB 136 Impairment, Paragraph 9.

An entity shall assess at the end of each reporting period whether there is any indication that an asset
may be impaired. If any such indication exists, the entity shall estimate the recoverable amount of the
asset.
Able Ltd

Balance date 30 June

1 Oct 2016 Equipment Cost $160,000

Estimated Residual 10,000
Depreciable Amount $150,000

Useful life is 8 years  depreciation rate 12.5%

Depreciation 30/6/2017 = $150,000 x 12.5% x 8/12 = $12,500

Carrying amount 30/6/2017= $160,000 - $12,500 = $147,500

Recoverable amount $98,750 is the higher of the net selling price ($98,750) and value in use
is ($90,000)

Impairment write down = $147,500 - $98,750 = $48,750

Journal Entries

1/10/16 Machinery $160,00

0
Cash/Payables $160,000
(Being purchase)
30/6/17 Depreciation Expense 12,500
Accumulated Dep’n Machinery 12,500
(Being annual depreciation)
1/7/17 Impairment Loss 48,750
Accumulated Impairment Loss 48,750
(Being impairment writedown)

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ACCT 10002: Introductory Financial Accounting
Tutorial 6 – Solutions