Week 10 : Chapter 14: Non-current assets: acquisition and depreciation

Discussion questions

1. Discuss which of the following should be included in the cost of equipment: (a)
installation charges, (b) freight charges, (c) cost of building foundations, (d) new parts
needed to replace those damaged while unloading, (e) 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?

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?

3. Z Ltd depreciates its equipment using the straight-line method of depreciation. Y Ltd,
which owns the same equipment, and has 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 non-comparable? Explain.

4. What is the distinction between an overhaul, replacement of a component, and day-to-

5. ‘With proper maintenance, certain equipment will last almost indefinitely, in which case
depreciation is not necessary.’ Discuss.

6. 'It does not matter which depreciation method is used for a particular asset or class of
assets because the total accumulated depreciation will be the same at the end of the
assets life regardless of the depreciation method used'. Discuss.

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Exercise 14.2

Cost and annual depreciation

GST version

On 1 July 2022, Kirby Ltd purchased a machine with a list price of $351 500. Due to their
business relationship, the supplier provided a trade discount of 10% plus GST and credit
terms of 2/10, n/30. Payment was made within the discount period. Freight costs of $8910
(GST Inclusive) and installation costs of $8712 (GST Inclusive) were also paid. The
machine has a useful life of 5 years and a residual value at the end of its useful life of
$20 000.

Required
(a) Determine the amount that should be debited to the machinery account and prepare a general
journal entry to record the purchase, assuming a financial year ending 30 June.
(b) Determine the amount of depreciation expense for each of the 5 years ending 30 June
assuming use of:
i. the straight-line depreciation method
ii. the diminishing balance method of depreciation.
(c) Prepare a journal entry to record depreciation expense for the year ending 30 June 2023 using
the diminishing balance method of accounting for depreciation.

Note: it is necessary to remove GST from the GST Inclusive transactions:

Exercise 14.4

Depreciation methods

GST version

Express Taxi’s Ltd purchased a new van costing $88 000 (GST Inclusive) and paid an additional
$27 500 (GST Inclusive) for wheelchair conversion. It is expected to have a residual value of
$15 000 at the end of its useful life of 6 years or 300 000 kilometres.

Required
(a) Assume the van was purchased on 2 July 2022 and that the accounting period ends on 30
June. Calculate the depreciation expense for the year 2022–23 using each of the following
depreciation methods:
i. straight-line
ii. diminishing balance
iii. units of production (assume the van was driven 98 000 kilometres during the financial
year).
(b) Assume the van was purchased on 31 August 2022 and that the accounting period ends on 30
June. Calculate the depreciation expense for the year 2022–23 using each of the following
depreciation methods:

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 i. straight-line
ii. diminishing balance
iii. units of production (assume the van was driven 68 000 kilometres during the financial
year).

Note: remove GST from the transactions prior to recording.

Exercise 14.7
Improvements and revision of depreciation
GST version

The financial statements for Sotherby Ltd at 30 June 2022, presented a building with a cost of
$495 000 (GST Inclusive) and accumulated depreciation amounting to $220 000.
The entity has adopted the straight line method of accounting for depreciation on the building.
When initially purchased, management determined the building would have a useful life of 40
years and a residual value of $50 000.
On 1 January 2025 Sotherby Ltd completed structural improvements and internal renovations
amounting to $143 000 (GST Inclusive), both increasing the productive capacity and the
remaining useful life of the building for 30 more years. There is no changed to the residual
value.
Required
(a) Calculate the number of years the building had been depreciated to 30 June 2022.
(b) Prepare the journal entry/ies to record the cost of the structural improvements and
removations on 1 January 2025. relating to the building between 1 July 2024 and 1 January
2025 inclusive.
(c) Prepare the general journal entry to record the building’s depreciation expense for the year
ended 30 June 2025.

Note: remove GST from transactions

Students can also refer to 2018 Final Exam Question for Non-Current Assets Q26 – Part A