ACC102 Nicolaidis Ltd Purchase and Statement

On 1 January 2017, Nicolaidis Ltd purchased two identical new machines at a total cost of $700 000 plus GST. It was estimated that the machines would have a useful life of 10 years and a residual value of $50 000 each. Nicolaidis Ltd uses the straight-line method of depreciation for all of its equipment. The company’s end of reporting period is 31 December.

Required

Record the purchase of the trucks on 1 January 2017.
Record the depreciation expense on the trucks for 2022.
Assume that early in 2023 the company revalued the machines upwards by $80 000 each and assessed that the machines would last 6 more years instead of 4 but that the residual value would be $80 000. Record all journal entries for the trucks in 2023.
Make the necessary entries to record the sale of one of the machines on 31 December 2023. The machine was sold for $200 000 plus GST. (Assume that the two machines had the same carrying amount, which equalled their fair values at this date.)
How much depreciation expense would be recorded on the second machine during 2025 if it were still being used and if its residual value were still $50 000? Why?

Case Study Two:

Tamworth Trading Ltd is a company operating in the retail sector. The beginning inventory of Product EF5089 and information about purchases and sales made during June are shown below.

Tamworth Trading Ltd uses the perpetual inventory system, and all purchases and sales are on credit. Selling price is $5 per unit. GST is 10% and is not included in any of the costs and selling prices above. A stocktake on 30 June revealed 5150 units in inventory. Ignore GST.

Required

Using the FIFO method, prepare appropriate purchases and sales journals to record these events.
Prepare an appropriate inventory record for Product EF5089 for June, and post the journals prepared in requirement A above to the appropriate general ledger accounts (assuming that product EF5089 is the only product bought and sold by Tamworth Trading Ltd).
Prepare an income statement for Tamworth Trading Ltd for June.

Case Study Three:

In early July 2019, Masterton Ltd is considering the acquisition of some machinery for $1 320 000 (GST inclusive) to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500 000 units of the new product. The residual value of the machinery is $100 000.

The following projections were made in order to select a depreciation method to be used for the machinery.

In calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense.

Required

As the accountant for Masterton Ltd, prepare separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods:

straight-line
diminishing balance

sum-of-years’-digits

units-of-production.

Use the following headings for each schedule: ‘Year ending 30 June’, ‘Annual depreciation expense’, ‘Accumulated depreciation’, ‘Carrying amount at end of year’.

Answer:

Assessment Question 1

In the books of Nicolaidis Ltd
Journal Entries
Sl. No.	Date	Particulars	Dr./Cr.	Amt ($)	Amt ($)
(a)	2017	Machinery	Dr.	700,000
	1-Jan	GST receivable	Dr.	70,000
		To Cash at bank	Cr.		770,000
		(Being machines purchased)

(b)	2022	Depreciation on Machinery	Dr.	60,000
	31-Dec	To Acccumulated Depreciation on Machinery	Cr.		60,000
		(Depreciation on trucks - (700000-100000)/10

(c)	2023	Accumulated Depn on Machinery	Dr.	360,000
	Jan	Write back of Acc Depn - machinery - revaluation	Cr.		360,000

		Machinery	Dr.	160,000
		To Gain on revaluation of machinery	Cr.		160,000
		(Revaluation of machinery being made)

	31-Dec	Depreciation on Machinery	Dr.	70,000
		To Acccumulated Depreciation on Machinery	Cr.		70,000
		(Depreciation on trucks - (500000-80000)/6

(d)	2023	Cash at Bank	Dr.	220,000
	31-Dec	To GST Payable	Cr.		200,000
		TO Proceeds from Sale - Machinery	Cr.		20,000
		(Being amount received on sale of machinery)

		Carrying amount - Machinery	Dr.	215,000
		Accumulated Depreciation - Machinery	Cr.	35,000
		To Machinery A/C	Cr.		250,000

In the given case, there would be no depreciation for the year ended 31^st December 2028 on the second machine as depreciation per annum as per straight line method would come out to $35000 per annum and by the end of 2027, the machine would be fully depreciated(Das, 2017). In case the management of the company knew earlier that the machinery will be used even beyond 2028, then there should have been a change or revision in the useful life of the asset prior to 2028. Now that the carrying value of the machine has reached to residual value, it is impossible to change further depreciation on the same(Dichev, 2017).

Value of one machine at beginning of 2023: $ 250000

Depreciation per year : $ 35000

31/12/2023: 250000-35000 = 215000

31/12/2024: 215000-35000 = 180000

31/12/2025: 180000-35000 = 145000

31/12/2026: 145000-35000 = 110000

31/12/2027: 110000-35000 = 75000

Therefore, left over depreciation to be charged for the year 2028 = 75000 – 50000 (residual value) = $ 25000

assessment Question 2

Sales Journal
Date	Account	Post Ref.	Sales	GST Payable	Receivable	Cost of Sales
9/6	4100 units @ $5	Yes	20,500	2,050	22,550	9,020
21/6	3100 units @ $5	Yes	15,500	1,550	17,050	6,875
24/6	2900 units @ $5	Yes	14,500	1,450	15,950	6,525
30/6	2600 units @ $5	Yes	13,000	1,300	14,300	6,150
			63,500	6,350	69,850	28,570
			(400)			(500)

Purchases Journal
Date	Account	Post Ref.	Inventory	GST Receivable	Payable
4/6	4600 units @ $2.25	Yes	10,350	1,035	11,385
12/6	4100 units @ $2.40	Yes	9,840	984	10,824
26/6	3100 units @ $2.50	Yes	7,750	775	8,525
			27,940	2,794	30,734
			(500)

General Journal
Date	Particulars	Dr./Cr.	Amt ($)	Amt ($)
30/6	Inventory loss	Dr.	120
	To inventory	Cr.		120
	(Shortage of stock recorded)

General Ledger
Sales (No. 400)
Date	Explanation	Posting Ref.	Debit	Credit	Balance
30-Jun	Balance	SJ		63,500	63,500

General Ledger
Inventory(No. 500)
Date	Explanation	Posting Ref.	Debit	Credit	Balance
1-Jun	Balance				13,420
30-Jun	Purchases	PJ	27,940		41,360
30-Jun	Cost of Sales	PJ		28,570	12,790
	Missing Inventory	PJ		120	12,670

Tamworth Trading Ltd
Income Statement
for the month ended June 30	Amt ($)
Income
Sales	63,500
Less: Sales Return and other allowances	-
Net Sales	63,500
Less: Cost of Goods Sold	28,570
Less: Inventory Loss	120
Gross Profit	34,810
Less: Other indirect expenses	-
Net Profit	34,810

Table 1: Workings for Straight Line and WDV Method
Particulars	Amt ($)
Cost of machinery (GST inclusive)	1,320,000
Less: GST @ 10%	120,000
Actual Cost of machinery	1,200,000
Life of machine = 10 Years
Residual value	100,000
Depreciable Amount	1,100,000
Depreciation each Year (St. Line method)	110,000

Depreciation Rate (Written Down value method)
=100 (1-Life*(Salvage Value/Cost)^1/2))
58%

In the books of Masterton Ltd
Sl. No.	Method of Depreciation	2020	2021	2022	2023	2024	Total
(i)	Straight Line Method (Table 1)	110,000	110,000	110,000	110,000	110,000	550,000
(ii)	Diminishing Balance Method	700,000	291,667	121,528	50,637	21,099	1,184,930
(iii)	Sum of year's Digit	200,000	180,000	160,000	140,000	120,000	800,000
(iv)	Units of Production	110,000	99,000	121,000	127,600	132,000	589,600

*Diminishing Balance method = Cost Rate of depreciation computed as table 1**
							Particulars	2020	2021	2022	2023	2024	Total
Opening Book value	1,200,000	500,000	208,333	86,806	36,169
Depreciation	700,000	291,667	121,528	50,637	21,099	1,184,930
Ending Book Value	500,000	208,333	86,806	36,169	15,070

Sum of years' digit method = (Remaining life / Sum of the years digits) x (Cost – Salvage value)
							Particulars	2020	2021	2022	2023	2024	Total
Remaining Life	10	9	8	7	6	55
Opening Book value	1,100,000	900,000	720,000	560,000	420,000
Depreciation	200,000	180,000	160,000	140,000	120,000	800,000
Ending Book Value	900,000	720,000	560,000	420,000	300,000

Units of Production method = (Number of units produced / Life in number of units) x (Cost – Salvage value)
							Particulars	2020	2021	2022	2023	2024	Total
Production Units	50,000	45,000	55,000	58,000	60,000	500,000
Opening Book value	1,100,000	990,000	891,000	770,000	642,400
Depreciation	110,000	99,000	121,000	127,600	132,000	589,600
Ending Book Value	990,000	891,000	770,000	642,400	510,400

References

Das, P., 2017. Financing Pattern and Utilization of Fixed Assets - A Study. Asian Journal of Social Science Studies, 2(2), pp. 10-17.

Dichev, I., 2017. On the conceptual foundations of financial reporting. Accounting and Business Research, 47(6), pp. 617-632.

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