ACCY112 Spring 2013-Week 6

5.

Questions: DQ20.5; DQ20.9; EQ20.3; EQ20.5; PQ20.12 Z Ltd depreciates its equipment using the straight-line method of depreciation. Y Ltd, which owns similar equipment, and purchased the item on the same day from the same supplier as Z Ltd, uses the diminishing-balance method. Are the depreciation charges of these two companies noncomparable? Explain. This question requires a discussion of the nature and purpose of depreciation. Assuming that depreciation is an allocation of cost over useful life, as per IAS 16/AASB 116, it is important to consider how to select an allocation method. Refer to the appropriate sections of the standard, and to the relevant discussion on allocation methods and their outcomes as covered in the text. Note that the total cost of an asset over its useful life and disposal is the same under all methods. It is not necessarily inconsistent that both Z Ltd and Y Ltd adopt different depreciation allocation patterns for the same asset, as they may have used the asset differently over their useful lives. The important criterion to consider in selecting a depreciation method is the expected pattern of usage of the economic benefits to be derived from the asset. The depreciation charges would be noncomparable if both companies used the same depreciation method over the same useful lives if the pattern of usage is different between Z Ltd and Y Ltd. What is the distinction between an overhaul, replacement of a component, and day-to-day repairs and maintenance? Give an example of each and explain how the accounting treatment is different. Expenditures for overhauls and replacement of components of assets are incurred to extend an assets useful life or to significantly extend an assets capacity to produce goods and services. Since these expenditures are regarded as an addition or extension to the asset, they should be depreciated over the useful life of that asset. When the costs of components are recorded separately and apart from another asset, such costs should still be depreciated but over the useful life of the components. Since expenditures on day-to-day repairs and maintenance do not extend or enhance the life of the asset, such expenditures are expensed in the period in which they are incurred. See the text for examples.

9.

Exercise 20.3

Determining cost

Required: Calculate the amount at which the machine should be recorded in the accounting records of Ready Ltd before it is put into full operation.

READY LTD

The only items in the list which would not be part of the cost of the machine are the cost of repairing the minor damage to the machine during testing and, assuming that the purchase discount is a settlement discount, it too would be excluded as this is a discount for paying early. Hence, the total cost of the machine is: Invoice price Freight cost Cost of transit insurance Installation costs Testing of machinery prior to use $16 000 400 100 1 200 150 $17 850 However, if the purchase discount of $320 is a trade discount, then the cost of the machine would net of the trade discount, namely $17 530.

Page 1 of 4

Exercise 20.5

DUBIOUS LTD Required: A. Assume the van was purchased on 2 July 2013 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2013-14 using each of the following depreciation methods: 1. straight-line 2. sum-of-years-digits 3. diminishing-balance 4. units of production (assume the van was driven 78 000 kilometres during the financial year). B. Assume the van was purchased on 1 October 2013 and that the accounting period ends on 30 June. Calculate the depreciation expense for the year 2013-14 using each of the following depreciation methods: 1. straight-line 2. sum-of-years-digits 3. diminishing- balance 4. units of production (assume the van was driven 60 000 kilometres during the financial year). A. 1. 2. 3. Straight-line: ($32 000 - $12 000)/4 = = = $5 000 10 $8 000

Depreciation methods

Sum-of-the-years digits: 4+3+2+1 ($32 000 - $12 000) 4/10 Diminishing-balance: 1

4

12000 = 22% (approx.) 32000

= 1 - .78 = .22 $32 000 x .22 4. = $7 040

Units-of-production: Expense per kilometre = ($32 000 - $12 000)/200 000 = $0.1 0.1 x 78 000 = Straight-line: ($32 000 $12 000)/4 x 9/12 Sum-of-the-years-digits: (4/10 x $20 000) 9/12 Diminishing- balance: ($32 000 x .22) 9/12 Units-of-production: $0.1 x 60 000

$7 800 = $3 750 = $6 000 = $5 280 = $6 000

B.

1. 2. 3. 4.

Page 2 of 4

Problem 20.12 Depreciation and overhauls: WELCOME LTD Required: Prepare journal entries for each of the given transactions. 2012 1. 1 Mar.

Delivery Van Cash at Bank Purchase of delivery van (including all costs to get the asset operational). Depreciation Expense Accumulated Depreciation Delivery Van Depreciation on delivery van. Depreciation = $30 700 - $12 000 = $18 700/4 x 4/12

30 700

30 700

2. 30 Jun.

1 558

1 558

2013 3. 1 July

Accumulated Depreciation Delivery Van Delivery Van Reversing accum. depn for 1 1/3 years, assuming the air conditioning units cost is a subsequent cost added to the asset Delivery Van Cash at Bank Purchase of air-conditioning unit for van Repairs Expense Cash at Bank Service and safety inspection costs Depreciation Expense Accumulated Depreciation Delivery Van Depreciation on machinery. $25 667 - $13 000 = 12 667 2.667 years = $4 750 Depreciation Expense Accumulated Depreciation - Delivery Van Depreciation for year Depreciation Expense Accumulated Depreciation - Delivery Van Depreciation for half-year Accumulated Depreciation Delivery Van Delivery Van Reversing accum. depreciation

6 233

6 233

1 July

1 200

1 200

4. 1 Sept.

800

800

2014 5. 30 Jun.

4 750

4 750

2015 6. 30 June

4 750

4 750

2016 7. 2 Jan

2 375

2 375

7.. 2 Jan

11 875

11 875

Page 3 of 4

2 Jan

Delivery Van Cash at Bank Overhaul of van. New remaining useful life of van is 1year and 2 months (14 months). Carrying amt is now $16 392. Depreciation Expense Accumulated Depreciation Delivery Van Depreciation on van. $16 392 - $14 000 = $2 392 x 6/14 months = $ 1 025 Depreciation Expense Accumulated Depreciation Delivery Van Depreciation on van. $2 392 x 8/14 months = $ 1 367 After 1 March 2014, the van would have reached the end of its useful life and would then be disposed of.

2 600

2 600

2016 30 Jun.

1 025

1 025

2017 8. 30 Jun.

1 367

1 367

Page 4 of 4