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BX2011 Topic07 Tutorial Questions 2022

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BX2011 Topic07 Tutorial Questions 2022

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Shaina khatri
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© © All Rights Reserved
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BX2011 – Foundation of Accounting Principles Questions - Topic 7, 2022

Topic 7 – Accounting for Non-Current Assets


Discussion Question – Chapter 14

Question 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?

Question 4:
During your lunchtime, which you usually spend at the university canteen in the presence of other
students, one particular accounting student who was having difficulty with the textbook complained that
he did not understand which costs were to be regarded as part of the acquisition cost of land, which costs
were to be attributed to buildings under construction, and which were to be treated as an expense. Explain
the basic principles to be followed. Are there any difficulties in applying these principles? Explain by
providing examples.

Question 5:
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.

Question 6:
Should depreciation be recorded on a building for a year in which the market value of the building has
increased? Discuss.

Question 9:
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.

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BX2011 – Foundation of Accounting Principles Questions - Topic 7, 2022
Problem 14.12 – Depreciation methods and partial years
Everest Construction Ltd operates three different types of machinery. Management has reviewed the
nature of each item of machinery and has chosen the depreciation method which best represents the
machinery usage within the entity. The table below presents the relevant information of each item of
machinery. Ignore GST.

Use of equipment type 2 was 7000 hours in the year ended 30 June 2023; 14800 hours in 2024; and 15400
hours in 2025 and 17200 in 2026.
Required:
Assuming the financial year ends on 30 June and that depreciation is recorded to the nearest month,
calculate the depreciation charges for 2023, 2024, 2025 and 2026 by preparing a schedule with the
following headings:
Depreciation expense for year ended 30 June
Equipment type 20230 2024 2025 2026

Problem 14.14 - Major overhauls and revision of depreciation


Tingles Ice Creamery Ltd purchased 2 new ice cream display units on 1 April 2022 for $21 175 (GST
Inclusive) per unit or total cost of $42 350 (GST Inclusive). The machinery will be depreciated using the
straight-line method over a useful life of 4 years. The residual value per unit is $3000.
On 1 October 2024, the compressor in one of the freezer units seized, requiring an overhaul of the unit at a
cost of $6 380 (GST Inclusive). It was expected the overhaul would extend the useful life of the freezer by
an additional 2 more years. The residual value remained unchanged. The carrying amount of the parts
replaced amounted to $1 200.
Required
Assuming the financial year ends on 30 June, prepare journal entries to record:
(a) the purchase of the ice cream displays on 1 April 2022.
(b) depreciation expense for 2022, 2023 and 2024.
(c) the overhaul expenditure on 1 October 2024.
(d) depreciation expense for 2025.

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BX2011 – Foundation of Accounting Principles Questions - Topic 7, 2022
Discussion Question – Chapter 15
Question 1:
Discuss whether and how a company should account for a revaluation increase and a revaluation decrease
on property, plant and equipment. Discuss also the accounting treatment if such an increase or decrease is
reversed.

Question 2:
What is meant by ‘recoverable amount’? When are assets to be written down to recoverable amount?
What must an entity do if it is unable to determine the recoverable amount of an individual asset?

Problem 15.17
On 2 January 2021, Gormly Ltd purchased a machine for $165 000. The machine had a useful life of 5 years
and a residual value of $5000. Straight-line depreciation is used. The machine is to be disposed of on 1 July
2025. Ignore GST. Gormly Ltd balances its accounts on 31 December.
Required
(a) What entry should be made to record depreciation prior to the disposal?
(b) Prepare journal entries to record the disposal of the machine under each of the following assumptions.
i. The machine is sold for $80,000 cash.
ii. The machine is sold for $48,500 cash.
iii. The machine and cash of $120,000 are exchanged for a new machine with a cash price of $140,000.
iv. The machine was completely destroyed by fire and cash of $45 000 was received from the
insurance company.
v. The machine and cash of $140,000 are exchanged for a new machine with a cash price of $170,000.

Problem 15.18 - Revaluation, reversals and depreciation


Harrison Ltd has a policy of revaluing its motor vehicles to fair value. The details at 30 June 2023 relating to
Harrison Ltd’s motor vehicles, which had previously been revalued upwards by $28000, are as follows.

Motor vehicles $ 352,000


Less: Accumulated depreciation 88, 000 $ 264, 000

At the date of the revaluation increase (1 July 2022) the vehicles had a zero residual value and a useful life
of 4 years. Depreciation has been calculated using the straight-line method. On 31 December 2023,
Harrison Ltd was informed that the fair value of the vehicles was $200 000. The useful life and residual
value have not changed. At 30 June 2024, the carrying amounts are not materially different from fair
values.
Required
(a) Prepare the necessary general journal entries at 31 December 2023.
(b) Calculate depreciation expense at 30 June 2024.
(c) How would the motor vehicle be shown in financial statements at 30 June 2024?

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