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ACC201 Solutions - 1T2018 - Workshop 07 - Week 08

This document provides an accounting workshop activity on non-current assets. It includes 4 questions about determining the cost of equipment, recording asset acquisitions at cost, calculating depreciation expense using the straight-line method for machinery purchased by two companies, and recording the related journal entries. The principles of capitalizing acquisition costs and recording non-current assets at cost rather than fair value according to accounting standards are also discussed.

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66 views3 pages

ACC201 Solutions - 1T2018 - Workshop 07 - Week 08

This document provides an accounting workshop activity on non-current assets. It includes 4 questions about determining the cost of equipment, recording asset acquisitions at cost, calculating depreciation expense using the straight-line method for machinery purchased by two companies, and recording the related journal entries. The principles of capitalizing acquisition costs and recording non-current assets at cost rather than fair value according to accounting standards are also discussed.

Uploaded by

Luu Minh
Copyright
© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
Available Formats
Download as PDF, TXT or read online on Scribd
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ACC201 Financial Accounting 1

CLASS ACTIVITY

Workshop 7: Non-current assets: acquisition and depreciation


Prescribed textbook: Financial Accounting (10th edition) by Hoggett

1. Discuss which of the following should be included in the cost of equipment:

• installation charges,
• freight charges,
• cost of building foundations,
• new parts needed to replace those damaged while unloading,
• borrowing costs incurred to finance the purchase of the equipment.

What is the general principle to be followed in determining what should be included


in the cost of property, plant and equipment?

The cost of property, plant and equipment should include all of the expenditure
needed to obtain the asset and to get it to a condition and location ready for the
use intended by the purchaser. All of the expenditure listed, with the exception of
(c), (d) and (e), should be included in the cost of the equipment. The cost of
building foundations should be treated as part of the cost of property. The cost of
the new parts needed to replace those damaged while unloading should be
charged to expense. Borrowing costs could be treated as part of the cost of
property, plant and equipment only if the asset is a qualifying asset under IAS
23/AASB 123.

2. ‘According to IAS 16/AASB 116, an item of property, plant and equipment that
qualifies for recognition must be recorded at cost, representing the fair value of
any assets given up in order to acquire them.

Would it not be better to record the assets acquired at their own fair values rather
than at those of the assets given up?’

Discuss this suggestion and explain the rationale behind the accounting standard.
Do you agree with this rationale? Why or why not?

ACC201 FA1 Class Activity Page 1 of 3 Updated: 15 July 2019

Questions adopted from Financial accounting / John Hoggett, John Medlin, Keryn Chalmers,
Claire Beattie, Andreas Hellmann, Jodie Maxfield Tenth edition. John Wiley & Sons Australia, Ltd
Since the cost system has been adopted in accounting standard IAS 16/AASB 116
for the acquisition of assets, assets acquired are to be valued at their cost, as
measured by the fair value of all net assets given up. Cost is logically measured
by what is given up or sacrificed, not by what is received. If assets acquired are
to be valued at their own fair values, this would mean that the cost system has
been abandoned in favour of some other system e.g. fair value/current value
accounting. Consider whether fair values at acquisition date provide information
more relevant than the cost system to help users to make economic decisions.
After acquisition date, consider then whether fair values would be more relevant
than (depreciated) cost.

3. On 1 July 2018, Johnston Ltd purchased a machine with a list price of $250,000.
Freight costs of $5,000 and installation costs of $2,500 were also paid in cash. The
machine has a useful life of 4 years and a residual value at the end of its useful
life of $25,000.

Required:

Determine the amount that should be debited to the machinery account and
prepare a general journal entry to record the purchase

Determine the amount of depreciation expense for the year ending 30 June 2019
assuming use of the straight-line depreciation method

Prepare a journal entry to record depreciation expense for the year ending 30 June
2019 under the straight-line depreciation method

Cost of machine = $250,000 + $5,000 + $2,500


= $257,500

Depreciation expense = (257,500- 25,000) / 4 = 58,125

ACC201 FA1 Class Activity Page 2 of 3 Updated: 15 July 2019

Questions adopted from Financial accounting / John Hoggett, John Medlin, Keryn Chalmers,
Claire Beattie, Andreas Hellmann, Jodie Maxfield Tenth edition. John Wiley & Sons Australia, Ltd
4. Powerhouse Ltd purchased machinery on 1 July 2018, at a cost of $800 000. The
machinery is depreciated using the straight-line method over a useful life of 8
years with a residual value of $80 000.

Required:

Assuming the financial year ends on 30 June, prepare journal entries to record:

• the purchase of the machinery on 1 July 2018


• depreciation expense for 2019

Depreciation expense = (800,000 – 80,000) / 8 = 90,000

ACC201 FA1 Class Activity Page 3 of 3 Updated: 15 July 2019

Questions adopted from Financial accounting / John Hoggett, John Medlin, Keryn Chalmers,
Claire Beattie, Andreas Hellmann, Jodie Maxfield Tenth edition. John Wiley & Sons Australia, Ltd

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