Ch08_sm_carlon_5e.docx 3a4a6s

Solutions Manual to accompany

Financial ing: Recording, Analysis and Decision Making Fifth Edition Prepared by

Ngaire Kirk

John Wiley & Sons Australia, Ltd 2016

Chapter 8: Reporting and analysing non-current assets

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS ASSIGNMENT CLASSIFICATION TABLE

Learning Objectives

Brief Exercises

Exercises

Problems

1.

Explain the business context of noncurrent assets and the need for decision making for non-current assets

6

2.

Describe how the cost principle applies to property, plant and equipment assets.

1

1

1A, 2A, 1B, 2B

3.

Explain the concept of depreciation.

4.

Calculate depreciation using various methods and contrast the expense patterns of the methods.

2, 3

2, 3, 4, 7, 10

2A, 4A, 6A, 7A, 8A, 2B, 4B, 6B, 7B, 8B

5.

for subsequent expenditures.

4

6.

for asset impairments.

5

5A, 5B

7

for the revaluation of property, plant and equipment assets.

6, 7

4A, 6A, 4B, 6B

8

for the disposal of property, plant and equipment assets.

4

6, 8

2A, 3A, 4A, 2B, 3B, 4B

9.

Describe the use of an asset .

10.

Identify the basic issues related to reporting intangible assets.

5

9, 10, 11

9A, 9B

11.

Describe the common types of intangible assets.

12.

Explain the nature and measurement of agricultural assets.

13.

for the acquisition and depletion of natural resources.

14.

Indicate how non-current assets are reported in the statement of financial position, and explain the methods of evaluating the use of non-current assets.

10

6, 7

© John Wiley and Sons Australia Ltd, 2016

10, 12

2A, 10A, 2B, 10B

8.1

Solutions manual to accompany Financial ing: Recording, Analysis and Decision Making 5e

CHAPTER 8 – REPORTING AND ANALYSING NON-CURRENT ASSETS ANSWERS TO QUESTIONS 1.

Review the chapter for the kinds of questions decision makers require for non-current assets including what non-current assets does the entity need to sustain or expand its future operations and profitability? How much of the entity’s resources should be tied up in non-current assets? Should an entity buy or rent?

2.

For PPE assets, the cost principle states that PPE assets are recorded at cost, which consists of all expenditure necessary to acquire the asset and make it ready for its intended use.

3.

GST only impacts on ing for the purchase and sale of non-current assets.

4.

The primary advantages of leasing are:

5.

(a)

reduced risk of obsolescence

(b)

nil or low down payment

(c)

shared tax advantages

(d)

reduced recorded assets and liabilities.

The effects of the three methods on annual depreciation expense are: (a)

Straight-line – constant amount

(b)

Diminishing-balance – decreasing amount

(c)

Units-of-production – varying amount.

6.

Capital expenditures are additions and improvements incurred to increase the operating efficiency, productive capacity or the expected useful life of the asset. These expenditures are usually material in amount, incur infrequently and are recorded as debits to the PPE asset affected, whereas expenses are expenditures for the ordinary repairs made to maintain the operating efficiency and expected productive life of the asset. These expenditures usually occur frequently and are recorded as a debit to the Repairs and Maintenance Expense as incurred and are an expense in the income statement.

7.

In a sale of PPE assets, the carrying (book) value of the asset is compared to the proceeds received from the sale. If the proceeds of the sale exceed the carrying value of the PPE asset, a gain on disposal occurs. If the proceeds of the sale are less than the carrying value of the PPE asset sold, a loss on disposal occurs.


8.2


8.

Depreciation, amortisation and depletion are all concerned with writing off the cost of an asset to expense over the periods benefited. Depreciation refers to allocating the cost of a PPE asset to expense over its useful life in a rational and systematic manner. Amortisation is the allocating of the cost of an intangible asset to expense. Depletion is the allocating of the capitalised preproduction costs of natural resources to inventory to reflect the units removed. The depleted amounts are recognised as expenses as part of Cost of Sales, when the natural resource inventory is sold.

9.

The favourable attributes which could result in goodwill include exceptional management, desirable location, good customer relations, skilled employees, high quality products, fair pricing policies and harmonious relations with trade unions.

10.

After initial recognition of cost, each class of non-current asset may be measured on the cost or fair value basis. Any revaluations of non-current assets must be carried out by class of asset. For intangibles to be revalued there must be an active market. increases and decreases within the same class must not be offset against one another. Any initial revaluation to a value above the up-to-date carrying amount is referred to as a revaluation increase and is credited directly to equity to an entitled Revaluation Surplus. Any initial revaluation to a value below the up-to-date carrying amount is a revaluation decrease. A revaluation decrease is treated as an expense in the income statement. If in a subsequent period the initial revaluations reverse, the revaluation increase (decrease) for an asset it should be offset against the previous revaluation decrease (increase) of that asset, to the extent of the amount of the previous revaluations. For reversals against the Revaluation Surplus there must be balances available for that asset in the reserve. The steps to record the revaluation are: (a)

Record the depreciation (if it is a depreciable asset) to date of revaluation

(b)

Transfer the balance of the contra , Accumulated Depreciation, to the asset to give the assets carrying value

(c)

Record the revaluation.

11.

Agricultural assets are living animals and plants (biological assets) that are a result of agricultural activity. Agricultural assets include forests, livestock, crops, fruit bearing trees and produce of aquaculturalists. Once the assets are mature and no longer ‘living’ – the tree is felled, the crops harvested, sheep shorn or animals are slaughtered – the assets fall within the scope of IAS 102 Inventories and are measured according to that standard.

12.

By selecting a higher estimated useful life, Jonty Ltd is spreading the PPE asset’s cost over a longer period of time. The depreciation expense reported in each period is lower and profit is higher. Amber Ltd’s choice of a shorter estimated useful life will result in higher depreciation expense reported in each period and lower profit. Therefore, Jonty Ltd may appear to be a better performer.


8.3


SOLUTIONS TO BRIEF EXERCISES BRIEF EXERCISE 8.1 Knight Ltd The GST exclusive amount of all of the expenditure except for fencing should be included in the cost of the land. Therefore the cost of the land is: (a) $214,600* (b) $195,091 (214,600/1.1)** (c) $186,609 (214,600/1.15)** * $180,000 + $10,000 + $9,500 + $8,100 + $7,000. ** To calculate the GST exclusive amount divide the GST inclusive amount by (1+GST rate). BRIEF EXERCISE 8.2 Brianna Ltd Purchase: GST Exclusive amount is $96,600 Depreciable amount is $92,600 ($96,600 - $4,000). With a 5 year useful life, annual depreciation is $18,520 ($92,600 ÷ 5). Under the straight-line method, depreciation is the same each year. Thus, depreciation is $18,520 for both the first and second years.

BRIEF EXERCISE 8.3 Brianna Ltd The declining-balance rate is 30% (1/5 x 1.5) and this rate is applied to book value at the beginning of the year. The calculations are: Carrying Amount

x

Rate

=

Depreciation

Year 1

$96,600

30%

$28,980

Year 2

($96,600 - $28,980)

30%

$20,286


8.4


BRIEF EXERCISE 8.4 James Ltd (a) Accumulated Depreciation – Delivery Equipment Delivery Equipment

$59,000

(b) Accumulated Depreciation – Delivery Equipment Loss on Disposal Delivery Equipment

$56,000 $3,000

$59,000

$59,000 $59,000

Cost of delivery equipment Less accumulated depreciation Carrying value at date of disposal Proceeds from sale Loss on disposal

56,000 3,000 0 $ 3,000

BRIEF EXERCISE 8.5 Elliot Ltd (i) (a)

1/7/15

Patent

$220,000 Cash/s Payable

31/6/16

(b)

(ii) (a)

Patent Amortisation Expense ($220,000 ÷ 10) Accumulated Amortisation Patents

$220,000 $22,000 $22,000

Intangible Assets $198,000 The patent cost less accumulated amortisation would be shown in the notes to the financial statements with the net amount recorded in the Statement of Financial Position.

1/7/15

Patent GST

$200,000 $20,000 Cash/s Payable

31/6/16

(b)

Patent Amortisation Expense ($200,000 ÷ 10) Accumulated Amortisation Patents

$220,000 $20,000 $20,000

Intangible Assets $180,000 The patent cost less accumulated amortisation would be shown in the notes to the financial statements with the net amount recorded in the Statement of Financial Position.


8.5


BRIEF EXERCISE 8.6 Fish Ltd (a)

Average useful life

=

Average cost of PPE assets Depreciati on expense

= ((40.8b+39.2b)/2)/1.6b =25 years

(b)

Average Age

=

Accumulate d depreciati on Depreciati on expense

=9.6b/1.6b = 6.0 years (c)

Asset turnover ratio

=

Net sales Average total assets

=21.17b/ (37.42b+35.58b)/2 = 0.58 times

BRIEF EXERCISE 8.7 Irish Ltd Partial Statement of Financial Position as at 31 March 2017

Non-Current Assets Property, plant and equipment Goodwill Other intangibles assets

Note

$ ‘000

13 15 16

1916.9 198.9 59.4

In the Notes to the financial statements the following disclosures would be made: Note 13 Property, plant and equipment Land and buildings Plant and equipment Accumulated depreciation Total property, plant and equipment Notes 15 & 16 Goodwill Goodwill Impairment of goodwill Other intangibles Accumulated amortisation Total goodwill and intangible assets


$ ‘000 $782.4 3294.6 (2160.1)

$ ‘000

$1916.9

$ ‘000 $520.4 (321.5) 145.9 (86.5)

$ ‘000 $198.9 59.4 $258.3

8.6


SOLUTIONS TO EXERCISES EXERCISE 8.1 Sunny Ltd (a)

The following points explain the application of the cost principle in determining the acquisition of PPE assets. 1. Under the cost principle, the acquisition cost for a PPE asset includes all expenditures necessary to acquire the asset and make it ready for its intended use. 2. For example, the cost of factory machinery includes the purchase price, freight costs paid by the purchaser, insurance costs during transit, and installation costs. 3. Cost consists of the fair value of all expenditures necessary to acquire the asset and make it ready for its intended use. 4. Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.

(b)

1. 2. 3. 4.

Land Delivery Truck Land Improvements Prepaid Insurance

5. 6. 7. 8.

Delivery truck Factory Machinery Motor Vehicle Expense Factory Machinery


8.7


EXERCISE 8.2 Tops Ltd Cost of new machine $228,000 purchased 1 October 2015 Balance date 31 December Estimated residual $28,000 Depreciable amount = Cost less Residual = $228,000 - $28,000 = $200,000 (a)

(b)

Straight line depreciation rate

=

100% ÷ 10 years = 10%

2015 Depreciation expense

= = =

Depreciable amount x dep’n rate x 3 months $200,000 x 10% x 3/12 $5,000

2016 Depreciation expense

= = =

Depreciable amount x dep’n rate $200,000 x 10% $20,000

Diminishing-balance method: Straight line rate doubled (given in question) 10% x 2 = 20% 2015 depreciation

=

$228,000 x 20% x 3/12 = $11,400

Carrying value January 1, 2016 = $228,000 - $11,400 = $216,600 the Diminishing-balance method applies the rate to the carrying value not the depreciable amount. 2016 depreciation (c)

Units-of-production method: Depreciation cost per unit

2015 depreciation

=

$216,600 x 20% = $43,320

= = =

Depreciable amount ÷ Total units of production $200,000 ÷ 40,000 hours $5.00 per hour

=

1800 hours x $5.00 = $9,000.


8.8


EXERCISE 8.3 AJ Bus Ltd (a)

Bus purchased $268,000 and residual value $10,000. Therefore the depreciable amount $258,000 ($268,000 - $10,000). Depreciation cost per unit

= = =

Depreciable amount ÷ Total units of production $258,000 ÷ 120,000 kilometres $2.15 per kilometre

Calculation

(b)

Years 2015 2016 2017 2018 2019

Annual Units of Depreciation Depreciation Production X Cost/Unit = Expense 29,000 $2.15 $62,350 28,000 2.15 60,200 30,000 2.15 64,500 20,000 2.15 43,000 13,000 2.15 27,920 120,000 $258,000


End of Year Accumulated Depreciation $62,350 122,550 187,050 230,050 258,000

Carrying Value $205,650 145,450 80,950 37,950 10,000

8.9


EXERCISE 8.4 Lion Ltd Balance date 30 June 1 January 2016

Equipment Cost Estimated Residual Depreciable Amount

Straight line depreciation rate (a)

b)

=

100% ÷ 8 years = 12.5%

Depreciation expense for year 2016 $160,000 x 12.5% x 6 months

=

$10,000

Depreciation expense for year 2017 $160,000 x 12.5%

=

$20,000

Journal entry for overhaul (i)

(ii)

(c)

$180,000 20,000 $160,000

Equipment Cash/Payables

$8,800

Equipment GST Paid Cash/Payables

$8,000 800

$8,800

$8,800

Depreciation expense for year 2019:

Carrying value at 30/6/18 $180,000 less ($10,000 + $20,000 + $20,000) = $130,000. 1 July 2018 addition $8,800. Therefore the carrying amount is now $138,800 which will also be the depreciable amount as the expected residual is nil. Depreciation rate is 100% ÷ 5 years = 20% Depreciation expense 2019 is $138,800 x 20% = $27,760.


8.10


EXERCISE 8.5 Able Ltd Balance date 30 June 1 Oct 2016


$160,000 10,000 $150,000

Useful life is 8 years  depreciation rate 12.5% Depreciation 30/6/2017 = $150,000 x 12.5% x 8/12 = $12,500

Carrying amount 30/6/2017= $160,000 - $12,500 = $147,500 Recoverable amount $98,750 is the higher of the net selling price ($98,750) and value in use ($90,000) Impairment write down = $147,500 - $98,750 = $48,750 Journal Entries 1/10/1 6

Machinery

Cash/Payables (Being purchase) 30/6/17 Depreciation Expense Accumulated Dep’n Machinery (Being annual depreciation) 1/7/17 Impairment Loss Accumulated Impairment Loss (Being impairment writedown)

$160,000 $160,000 12,500 12,500 48,750


48,750

8.11


EXERCISE 8.6 Wall Ltd 1 January 2015


$55,000 5,000 $50,000

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5% Annual depreciation is $6,250p.a. ($50,000 ÷ 8 or $50,000 x 12.5%) After revaluation 1 July 2017, new depreciation is over 7 years. (a) 1/1/15

30/6/15

30/6/16

30/6/17

Journal Entries Equipment Cash (Being purchase of equipment)

Sale 1/1/19

1/1/19

$ 55,000 55,000

Depreciation Expense Accumulated Depreciation Equipment ($50,000 ÷ 8 x 6/12)

3,125

Depreciation Expense Accumulated Depreciation Equipment ($50,000 ÷ 8)

6,250


6,250

Revaluation 1/7/17 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $39,375)

30/6/18

$

3,125

6,250

6,250

15,625 15,625

Equipment Revaluation Surplus (New carrying amount $70,000. Revaluation (70,00039,375) = 30,625)

30,625

Depreciation Expense Accumulated Depreciation Equipment 70,000 ÷ 7 years]

10,000

Depreciation Expense Accumulated Depreciation Equipment [$70,000  7 years x 6/12 dep’n to date of sale]

5,000

Accumulated Depreciation Equipment Cash Equipment Gain on sale of equipment (Being disposal of equipment)

Calculation of gain on sale Cost Accumulated Depreciation (10,000 + 5,000) Carrying amount of equipment sold Proceeds from sale Gain on sale


30,625

10,000

5,000

15,000 56,500 70,000 1,500

$70,000 (15,000) 55,000 56,500 $1,500

8.12


(b) 1 January 2015


$50,000 5,000 $45,000

Useful life 8 years. Depreciation rate 100% ÷ 8 years = 12.5% Annual depreciation is $5625p.a. ($45,000 ÷ 8 or $45,000 x 12.5%) After revaluation 1 July 2017, new depreciation is over 7 years.

1/4/15

30/6/15

30/6/16

30/6/17

Journal Entries Equipment GST Paid Cash (Being purchase of equipment)

Sale 1/1/19

1/1/19

$ 50,000 5,000 55,000

Depreciation Expense Accumulated Depreciation Equipment ($45,000÷ 8 x 6/12)

2,813


5,625


5,625

Revaluation 1/7/17 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $35,937)

30/6/18

$

2813

5,625

5,625

14,063 14,063

Equipment Revaluation Surplus [New carrying amount $70,000. Revaluation (70,00035,937)=34,063]

34,063

Depreciation Expense Accumulated Depreciation Equipment (70,000 ÷ 7 years)

10,000

Depreciation Expense Accumulated Depreciation Equipment [$70,000  7 years x 6/12 dep’n to date of sale]

5,000

Accumulated Depreciation Equipment Cash Loss on sale of equipment GST Collected Equipment (Being disposal of equipment)

Calculation of loss on sale Cost Accumulated Depreciation (10,000 + 5,000) Carrying amount of equipment sold Proceeds from sale (net of GST) Loss on sale


34,063

10,000

5,000

15,000 56,500 3,636 5,136 70,000

$70,000 (15,000) 55,000 51,364 $3,636

8.13


EXERCISE 8.7 (a) Capers Ltd Balance date 30 June 1 July 2014 Equipment Cost Estimated Residual Depreciable Amount

$200,000 15,000 $185,000

Useful life 10 years. Depreciation rate 100% ÷ 10 years = 10% Annual depreciation is $18,500 p.a. ($185,000 x 10%) Journal Entries 1/7/14

$ 200,000 20,000

Equipment GST Paid Cash (Being purchase of equipment)

220,000

30/6/15 Depreciation Expense Accumulated Depreciation Equipment ($185,000 x 10%)

18,500

30/6/16 Depreciation Expense Accumulated Depreciation Equipment ($185,000 x 10%)

18,500

Revaluation 1/7/16 Accumulated Depreciation Equipment Equipment (Carrying value before revaluation = $163,000) Equipment Revaluation Surplus (New carrying amt $163,000 + $17,000 = $180,000) 30/6/17 Depreciation Expense Accumulated Depreciation Equipment [($180,000 - $10,000) ÷ 8 years]

1/1/18

1/1/18

Revaluation downward Depreciation Expense Accumulated Depreciation Equipment [($180,000 - $10,000) ÷ 8 years x 6/12] Accumulated Depreciation Equipment Equipment (Carrying value before revaluation $148,125)

$

18,500

18,500

37,000 37,000

17,000 17,000

21,250 21,250

10,625 10,625

31,875 31,875 downwards

Revaluation Surplus Revaluation Expense Equipment (Being revaluation downward by $20,000)

17,000 3,000 20,000

(b) New carrying value = $128,125 (148,125-20,000)


8.14


EXERCISE 8.8 Zhou Ltd 2016 Jan. 1

June 30

June 30

Accumulated Depreciation – Machinery Machinery (Machine scrapped fully depreciated. 66,000/1.1)

$ 60,000

60,000 Cost

=

Depreciation Expense Accumulated Depreciation – Computer [$30,000 (33,000/1.1) x 1/6 x 6/12 – dep’n to date of sale] Cash Accumulated Depreciation – Computer Loss on Disposal Computer GST collected

Calculation of loss on disposal Cost Accumulated Depreciation (5,000 x 3 years + 2,500) Carrying amount of equipment sold Proceeds from sale excluding GST Loss on disposal Dec 31

Dec 31

$

Depreciation Expense Accumulated Depreciation – Truck [($20,000* - $2,000) x 1/6] (Update depreciation) *22,000/1.1 Loss on Scrapping Accumulated Depreciation – Truck [($20,000 - $2,000) x 5] Delivery Truck (Removal of asset from books)


2,500 2,500

13,200 17,500 500 30,000 1,200

$30,000 (17,500) 12,500 12,000 $500 3,000 3,000

5,000 15,000 20,000

8.15


EXERCISE 8.9 Wilkins Ltd

1/1/15

1/7/15

1/9/15

Patents GST Paid Cash (Purchase of patent useful life 10 years)

$ 400,000 40,000

440,000

Franchise GST Paid Cash (Purchase of franchise – remaining useful life 6 years)

300,000 30,000

Research and development expense GST Paid Cash (Assumed it was basic research and therefore expensed)

140,909.01 14,091.91

Amortisation calculations: Patent Expense ($400,000 ÷ 10) Franchise Expense [($300,000 ÷ 6) X 6/12] 31/12/15 Amortisation Expense Accumulated Amortisation Patents Accumulated Amortisation Franchise Ending balances 31/12/15: Patent = Franchises =

$

330,000

155,000

40 000 25,000 65,000 40,000 25,000

$360,000 ($400,000 - $40,000) $275,000 ($300,000 - $25,000)


8.16


EXERCISE 8.10 (a)

A company should depreciate its buildings because depreciation is necessary in order to allocate the cost of the buildings to the reporting periods in which the future benefits are consumed. Without depreciation, the depreciable assets would be overstated and not be a faithful representation of their future benefits.

(b)

A building can have a nil carrying value if it had no estimated residual value and it was fully depreciated – that is, if it has been used for a period longer than its expected life. Because depreciation is used to allocate cost rather than to reflect market value, it is not at all unlikely that a building could have a low or nil carrying value, but a positive market value.

(c)

Examples of intangibles that might be found on a university campus are; franchises of a bookstore chain or food outlets, and patents developed by academics.

(d)

Typical company or product trade names are: Clothes: Perfume: Cars: Shoes: Breakfast Cereals:

Colorado, Esprit, Lisa Ho, King Gee, Guess, Trelise Cooper. Tommy Hilfiger, Estee Lauder, Chanel No. 5, Lancôme. Daewoo, Nissan, Holden, Ford, Toyota. Honda Nike, Diesel, Vans, Diana Ferrari, Sachi, Ziera Rice Bubbles, Coco Pops, Weet-Bix, Uncle Toby’s.

Trade names and trademarks are reported on the Statement of Financial Position if the trade name or trademark is purchased. If it is developed by the entity, it cannot be recognised.


8.17


EXERCISE 8.11 MouseTrap Ltd Issue to be raised in the memo includes: By increasing the estimated life on its capitalised software costs, MouseTrap will increase its reported profit because amortisation expense will decrease. From an analyst’s perspective, one concern would be whether this twelve-year life is reasonable given that software products become obsolete very quickly. Another concern is that the qualitative characteristic of comparability is affected: for example, it becomes more difficult to compare the current year’s results with previous years’ because previous years used the three-year estimated life. EXERCISE 8.12 Beta Ltd Year ended 31 January 2015. (a)

Average useful life of PPE Assets

= = =

(b)

Average age of PPE Assets

= = =

(c)


= = =

Average cost of PPE assets Depreciation expense ($105,282  $90,861)  2 $6,399 15.3 years Accumulated depreciati on Depreciation expense $38,797 $6,399 6 years

Net sales Average total assets $1,663,970 ($609,041  $515,357 )  2 3 times

(d) The average age of PPE assets is often compared with the average useful life calculation. If the ratios are close together, the company may need to replace its assets in the near future, assuming the assumptions made in calculating the ratios are correct. (A test of these assumptions might be to compare the calculations with industry averages or those of competitors.) The asset turnover ratio is one indicator of how efficient a company is using its assets, usually the higher the ratio the better.


8.18


SOLUTIONS TO PROBLEM SET A PROBLEM SET A 8.1 Cameron Ltd Item 1 2 3 4 5 6 7 8 9

Land $250,000

Building

Other s $4,900

Land Improvements

31,800 5,320

Land Improvements Land Tax Expense

27,000 7,270 $21,900 51,000 629,500

(12,700) $271,570

$702,400

$42,020


8.19


PROBLEM SET A 8.2 Balance date is 30 June Porter Ltd (a) 1 2015 Aug 1

Land

$ 2,630,000

Cash (Purchase of Land) Oct 1

Oct 1

Dec 1

Depreciation Expense Accumulated Dep’n – Equipment ($675,000 x 1/10 x 3/12) Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal

$ 2,630,000

16,875 16,875

350,000 455,625 675,000 130,625

Cost (1/1/09) Accum. Dep’n – Equipment [($675,000 x 1/10 x 6.75yrs)] Carrying amount Cash proceeds Gain on disposal

$675,000 $455,625

Cash

1,800,000

219,375 350,000 $130,625

Land Gain on Disposal (Sale of Land)

300,000 1,500,000

2016 Jan 1

June 30

Equipment Cash (Purchase of Equipment)

1,000,000 1,000,000

Accumulated Dep’n – Equipment Equipment (Equipment fully depreciated on 31/12/2014)

470,000

Depreciation Expense Accumulated Dep’n – Buildings ($28,500,000 x 1/40)

712,500

470,000

(a) 2 2016 June 30

June 30

712,500

Depreciation Expense Accumulated Depreciation - Equipment

4,735,500

$46,855,000* x 1/10 $1,000,000 x 1/10 x 6/12

4,685,500 50,000 4,735,500

4,735,500

*($48,000,000 - $675,000 - $470,000)


8.20


(a) 3 Porter Ltd Partial Statement of financial position as at 30 June 2016 Property, plant and equipment* Land Buildings Less: Accumulated depreciation – buildings Equipment Less: Accumulated depreciation – equip. Total property, plant and equipment

$6,330,000 $28,500,000 12,812,500 47,855,000 8,826,750

15,687,500 39,028,250 $61,045,750

* See T-s which follow. Note that in the external reports the total of Property, plant and equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements.

30/06/15 Bal. B/d 1/8/15 Cash 30/6/16

Bal. b/d

Bal. b/d

30/06/15 01/01/16 Cash

30/06/16 Bal. b/d

01/10/15 30/06/16 30/06/16

Cash Bal. c/d

300,000 6,330,000 6,630,000

Buildings 28,500,000

30/06/15

30/06/16

Land 4,000,000 1/12/15 2,630,000 30/6/16 6,630,000 6,330,000

Accumulated Depreciation – Buildings 30/06/15 12,812,500 30/06/16 Dep’n Exp. 12,812,500 30/06/16 Bal b/d Equipment 48,000,000 1/10/15 1,000,000 30/6/16 - 30/06/16 49,000,000 47,855,000

Cash, etc. Acc. Depr. Bal. c/d

Accumulated Depreciation – Equipment Equipment, etc. 455,625 30/06/15 Equip. 470,000 1/10/15 Dep’n Exp. Bal. c/d 8,826,750 30/06/16 Dep’n Exp. 9,752,375 31/12/16 Bal. b/d


12,100,000 712,500 12,812,500 12,812,500

675,000 470,000 47,855,000 49,000,000

5,000,000 16,875 4,735.500 9,752,375 8,826,750

8.21


(b) 1 2015 Aug 1

Oct 1

Oct 1

Land GST Paid Cash (Purchase of Land) Depreciation Expense Accumulated Dep’n – Equipment ($613,636($675000/1.1) x 1/10 x 3/12) Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal GST Collected

$ 2,390,909 239,091

$

2,630,000

15,341 15,341

350,000 414,204 613,636 118,750 31,818

Cost (1/1/09) (675000/1.1) Accum. Dep’n – Equipment [($613,636 x 1/10 x 6.75yrs)] Carrying amount Cash proceeds (350,000/1.1) Gain on disposal Dec 1

Cash

$613,636 414,204 199,432 318,182 $118,750

1,800,000

Land ($300000/1.1) GST Collected (($1800000/1.1)*1/10) Gain on Disposal (Sale of Land)

272,727 163,636 1,363,637

2016 Jan 1

June 30

Equipment GST Paid Cash (Purchase of Equipment)

909,091 90,909

Accumulated Dep’n – Equipment Equipment (Equipment fully depreciated on 31/12/2014)

470,000


712,500

1,000,000

470,000

(b) 2 2016 June 30

June 30

712,500

Depreciation Expense Accumulated Depreciation – Equipment

4,737,091

$46,916,364* x 1/10 $909,091 x 1/10 x 6/12

4,691,636 45,455 4,737,091

4,737,091

*($48,000,000 - $613,636 - $470,000)


8.22


3.

Porter Ltd Partial Statement of financial position as at 30 June 2016 Property, plant and equipment Note Land 1 Buildings Less: Accumulated depreciation – buildings Equipment 2 Less: Accumulated depreciation – equip. 3 Total property, plant and equipment

$6,188,182 $28,500,000 12,812,500 47,825,455 8,868,228

15,687,500 38,957,227 $60,832,909

Notes 1 Land: 4,000,000+2,390,909-272,727 2 Equipment: 48,000,000-613,636+909,091-470,000 3 Accumulated Depreciation: 5,000,000+15,341-41,204-470,000+4,737,091


8.23


PROBLEM SET A 8.3 CupCake Ltd 2015 Jan 1

June 30

Accumulated Dep’n – Machinery Machinery (Scrapping machinery fully depr’d 31/12/15) Depreciation Expense Accumulated Dep’n – Computer (Update depreciation $49,000 x 1/7x 6/12)

June 30

Cash Accumulated Depreciation – Computer Gain on Disposal Computer (Sale of computer) Calculation of disposal Cost (1/1/12) Accum. Dep’n – Equipment [($49,000 x 1/7 x 3.5yrs)] Carrying amount Cash proceeds Gain on disposal Dec 31

Dec 31

Depreciation – Truck Accumulated Dep’n – Truck ([($27,000-$3,000) x 1/8] update depr’n) Accumulated Dep’n – Truck (5yrs) Loss on Disposal Truck (Scrapping of truck after 5 years)


$ 52,000

$ 52,000

3,500 3,500

31,000 24,500 6,500 49,000

$49,000 24,500 24,500 31,000 $6,500 3,000 3,000

15,000 12,000 27,000

8.24


PROBLEM SET A 8.4 Jupiter Ltd Year ending 30 June 2016 (a)

1/7/15

1/10/15

(b)

30/6/16

Land Buildings Cash/Payables

Machinery Cash/Payables

Depreciation Expense Accumulated Depreciation - Building Accumulated Depreciation - Machinery (Depreciation Building $250,000 ÷ 20 = $12,500) (Depreciation Machinery Rate

$ 400,000 250,000

$

650,000

120,000 120,000

55,700 12,500 43,200

= 1  4 9,000

120,000

= 1 - .5233 = 48% (approximately) Dep’n 30/06/13= $120,000 x 48% x 9/12 =$43,200

(c)

1/7/16

Land

80,000 Revaluation Surplus

1/7/16

(d)

31/12/16

Accumulated Depreciation – Building Revaluation Expense Building

12,500 50,000

Depreciation Expense Accumulated Depreciation - Machinery [($120,000 - $43,200) x 48% x 6/12]

18,432

Cost of Machinery Accumulated Dep’n ($43,200 + $18,432) Carrying amount at date of sale Proceeds Loss on disposal

31/12/16

80,000

Cash Accumulated Depreciation – Machinery Loss on Disposal Machinery


62,500

18,432

$120,000 (61,632) 58,368 50,000 $8,368

50,000 61,632 8,368 120,000

8.25


PROBLEM SET A 8.5 Shark Ltd Year ending 30 June

(a) 30/6/16

(b) 30/6/16

Depreciation Expense – Machinery Accumulated Depreciation – Machinery ($50,000 x 1/5 or #1 $2000, #2 $5000, #3 $3000) Impairment Loss Accumulated Impairment Loss Machine #2 (Writedown of mach #2 to recoverable amount) Machine 1 2 3

(c) 30/6/17

(d) 30/6/17

CV Recoverable Amt $8,000 $9,000 20,000 13,000 12,000 13,000

$ 10,000

10,000

7,000 7,000

Adj nil 7,000 nil

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (Depn #1 $2,000, #2 $3,250(13,000/4), #3 $3,000)

8,250

Accumulated Impairment Loss Machine #2 Income – Impairment Loss Reversal (Writedown of mach #2 to recoverable amount)

5,250

Machine 1 2 3

8,250

5,250

CV Recoverable Amt Adj $6,000 6,500 nil 9,750* 17,000 5,250** 9,000 9,500 nil

* $25,000-5,000-7,000-3,250=$9,750 **#2CV had the machine not been impaired $25,000-5,000-5,000=$15,000 max reversal permitted $15,000-9,750 =$5,250 This will reinstate #2 to CV of $15,000.


$

8.26


PROBLEM SET A 8.6 Toy Ltd Journal Entries $ (a) 30/6/15 Land – Wellington 1,400,000 Land – Auckland 400,000 Revaluation Surplus (Revaluation of land Wellington $1,400,000, Auckland 400,000) 30/6/15 Accumulated Dep’n – Buildings Building– Auckland (To close off the accumulated dep’n to asset A/c) Revaluation Surplus Loss on revaluation of building Building– Auckland (Revalue building from $850,000 to $750,000)

(b) 30/6/16 Depreciation Expense – Buildings Accumulated Dep’n – Buildings (Depreciation expense for the year $750,000 x 1/15)


$

1,800,000

150,000 150,000 50,000 50,000 100,000

50,000 50,000

8.27


PROBLEM SET A 8.7 Button Ltd Balance date 31 December (a) Year

Accumulated Depreciation 31/15

2012 2013 2014 2015

Calculation MACHINE 1 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350 $43,500 X 10% = $4,350

2013 2014 2015

MACHINE 2 $38,400 x 18.75% = $7,200 $31,200 x 18.75% = $5,850 $25,350 x 18.75% = 4,753(rounding)

$7,200 13,050 17,803

2013 2014 2015

MACHINE 3 1,000 X $2.00a = $2,000 3,000 x $2.00 = $6,000 4,000 x $2.00 = $8,000

$2,000 8,000 16,000

$4,350 8,700 13,050 17,400

a

$20,000 ÷ 10,000 hours = $2.00 per machine hour

(b) Depreciation expense for Machine 3 in 2015 under:  Straight-line method: ($26,000-$6,000)/5 = $4,000  Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5x 1/5 = 30% o 2013 = $26,000 x 30% = $7,800 o 2014 = ($26,000-$7,800) x 30% = $5,460 o 2015 = ($26,000-$7,800-$5,460) x 30% = $3,822  Units-of-production (from answer (a) above for 2015 = $16,000 Depreciation expense in 2015 is highest under Units-of-production method. The higher the expense, the lower the tax payment. So Units-of-production method is the preferred method for tax purposes for Machine 3 in 2015. (c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier year of an asset’s life.


8.28


PROBLEM SET A 8.8 Carpet Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation Depreciable Years Cost 2015 *$360,000 2016 360,000 2017 360,000 2018 360,000

X

End of Year

Depreciation Rate 25% 25% 25% 25%

=

Annual Depreciation Expense $90,000 90,000 90,000 90,000

Accumulated Carrying Depreciation Amount $90,000 $310,000 180,000 220,000 270,000 130,000 360,000 40,000

* ($400,000 – $40,000)

DIMINISHING-BALANCE DEPRECIATION

Years 2015 2016 2017 2018

Calculation Carrying Amount Depreciation Beginning of x Rate# Year $400,000 44% 224,000 44% 125,440 44% 70,246 44%

End of Year

=

Annual Depreciation Expense $176,000 98,560 55,194 *30,246

Accumulated Depreciation

Carrying Amount

$176,000 274,560 329,754 360,000

$224,000 125,440 70,246 40,000

* Adjusted for rounding error so ending carrying amount will equal residual value. # Depreciation rate

= 1  4 $40,000

$400,000

= 1 – 0.5623 = 44% approximately

(b)

Straight-line depreciation provides the lowest amount for 2015 depreciation expense ($90,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation provides the highest amount for 2015 depreciation expense ($176,000) and, therefore, the lowest 2015 profit. Over the four-year period, both methods result in the same total depreciation expense ($360,000) and, therefore, the same total profit.


8.29


PROBLEM SET A 8.9 Wang Ltd Year end 30 June 2016 (a) Jul 1 Patent Cash (Successfully defend Patent) Jul to Dec 1

Jan 1

Apr 1

$ 25,000

100,000

Development Costs (expenses) Cash/Payables (Development expenses incurred in devoping new product)

100,000

Patent Development Costs (expenses) ((Transfer development costs for patent for new product to asset )

100,000

Brand Expense Cash/Payables (Developed brand for new product)

30,000

May 1 Copyright Cash/Payables (Purchased copyright)

$

100,000

100,000

30,000

250,000 250,000

(b) Amortisation journals entries for year ended 31 December 2016 June 30

June 30

(c)

Amortisation Expense Accumulated Amortisation Patents [($80,000 ÷ 8 years) + (($25,000 ÷ 7 years) +(100,000/10 * 6/12)] Amortisation Expense Accumulated amortisation Copyrights [($36,000 x 1/10) + ($250,000 x 1/50 x 2/12)]

Intangible Assets Patents ($205,000 cost less $28,571 amortisation) (1) Copyrights ($286,000 cost less $18,833 amortisation (2) Total intangible assets

18,571 18,571

4,433 4,433

$176,429 267,167 $443,595

(1) Cost ($80,000 + $25,000 + 100,000); amortisation ($10,000 + $18,571) (2) Cost ($36,000 + $250,000); Amortisation ($14,400 + $4,433). (d) The intangible assets of Wang Ltd consist of two patents and two copyrights. One patent with a cost of $105,000 is being amortised over 10 years; the other patent granted 1 July 2015 was developed at a cost $100,000 and is being amortised over its legal life of 10 years. A copyright with a cost of $36,000 is being amortised over 10 years; the other copyright with a cost of $250,000 is being amortised over 50 years.


8.30


PROBLEM SET A 8.10 Ross Ltd & Yang Ltd (a)

(b)

Ross Ltd $1,420,000  3.3years $420,000

Yang Ltd $937,500  7.2years $130,000

Average useful life

$3,360,000  8years $420,000

$2,000,000  15years $130,000


$12,600,000 $10,300,000  3.36times  2.3times $3,750,000 $4,480,000

(1)

Average age of PPE assets

(2)

(3)

Based on the asset turnover ratio, Yang Ltd. is more effective in using assets to generate sales as its asset turnover ratio is higher than Ross Ltd’s ratio. One factor that complicates the comparison of the asset turnovers of the two companies is the wide difference in average age of the PPE assets. Assuming the estimated useful lives are realistically measured, Ross Ltd’s assets are in need of replacement much sooner than Yang Ltd’s (8-3.3 years versus 15-7.2 years). Another factor is the different composition of total assets for each company. For example, Ross Ltd has recorded goodwill, but Yang Ltd does not. Deleting the goodwill from Ross Ltd’s asset turnover ratio improves the ratio to about 2.5. Also, a much greater proportion of Ross Ltd’s total assets consist of PPE and intangibles. Finally, we are not told which valuation models are being used. If one company uses the revaluation model and the other the cost model, the comparison would become even more problematic.


8.31


SOLUTIONS TO PROBLEM SET B PROBLEM SET B 8.1 Box Ltd Item 1 2 3 4 5 6 7 8 9 10

Land $260,000

Building

Other s $6,750 Land Improvements

19,000 $23,000 2,179 29,000 Land Improvements 40,000 6,500 Land Tax Expense 600,000 (5,000) $276,179

$663,000

$42,250


8.32


PROBLEM SET B 8.2 King Ltd 2016 (a) 1. April 1

$ 2,400,000

Land Cash

May 1

May 1

June 1

Depreciation Expense Accumulated Dep’n – Equipment ($720,000 x 1/10 x 4/12)

2,400,000 24,000 24,000

Cash Accumulated Dep’n – Equipment Equipment Gain on Disposal

420,000 312,000

Cost (1/1/12) Accum. Dep’n – Equipment [($720,000 x 1/10 x 4 + $24,000)] Carrying value Cash proceeds Gain on disposal

$720,000 $312,000

Cash

1,800,000

720,000 12,000

408,000 420,000 $12,000

Land Gain on Disposal July 1

Dec. 31

Dec. 31

(a) 2. Dec. 31

Dec. 31

Equipment Cash Depreciation Expense Accumulated Dep’n – Equipment ($500,000 x 1/10- machine to be scrapped)

500,000 1,300,000 2,000,000 2,000,000 50,000 50,000

Accumulated Dep’n – Equipment Equipment (Equipment at 31/12/16 is now fully depreciated)

500,000


795,000

Depreciation Expense Accumulated Depreciation - Equipment $46,780,000* x 1/10 $2,000,000 x 1/10 x 6/12

$

500,000

795,000 4,778,000 4,778,000 $4,678,000 100,000 $4,778,000

*($48,000,000 - $720,000 - $500,000)


8.33


(a) 3. King Ltd Partial Statement of financial position as at 31 December 2016 Property, Plant and Equipment* Land Buildings Less: Accumulated depreciation – buildings Equipment Less: Accumulated depreciation – equip. Total property, plant and equipment

$5,500,000 $31,800,000 15,315,000 48,780,000 10,040,000

16,485,000 38,740,000 $60,725,000

* See T-s which follow. Note that in the external reports the total of Property, Plant and Equipment would be a one line item in the statement of financial position and the detailed breakdown above would be disclosed in the notes to the financial statements.

31/12/15 Bal. B/d 1/4/16 Cash 31/12/16 Bal. b/d

Cash Bal. c/d

500,000 5,500,000 6,000,000

Buildings 31,800,000

31/12/15

31/12/16

Land 3,600,000 1/6/16 2,400,000 31/12/16 6,000,000 5,500,000

Bal. b/d

31/12/15 1/7/16 Cash

31/12/16 Bal. b/d

Accumulated Depreciation – Buildings 31/12/15 15,315,000 31/12/16 Dep’n Exp. 15,315,000 31/12/16 Bal b/d Equipment 48,000,000 1/5/16 2,000,000 31/12/16 - 31/12/16 50,000,000 48,780,000

Cash, etc. Accum. Depr. Bal. c/d

Accumulated Depreciation - Equipment 1/5/16 Equipment 312,000 31/12/16 31/12/16 Equipment 500,000 1/5/16 Dep’n Exp. 31/12/16 Dep’n Exp. 31/12/16 Bal. c/d 10,040,000 31/12/16 Dep’n Exp. 10,852,000 31/12/16 Bal. b/d


14,520,000 795,000 15,315,000 15,315,000

720,000 500,000 48,780,000 50,000,000

6,000,000 24,000 50,000 4,778,000 10,852,000 10,040,000

8.34


(b) 1. April 1

May 1

May 1

June 1

Land GST Paid Cash Depreciation Expense Accumulated Dep’n – Equipment [$720,000 /1.1)x 1/10 x 4/12]

2,181,818 218,182 2,400,000 21,812 21,818

Cash Accumulated Dep’n – Equipment Equipment GST Collected Gain on Disposal

420,000 283,636

Cost (1/1/12) Accum. Dep’n – Equipment [($654,545 x 1/10 x 4 + $21,818)] Carrying value Proceeds (420,000/1.1) Gain on disposal

$654,545 $283,636

Cash

1,800,000

654,545 38,182 10,909

370,909 381,818 $10,909

Land (500,000/1.1) GST Collected ((18,000,000/1.1))*1/10) Gain on Disposal July 1

Dec. 31

Dec. 31

(b) 2. 2016 Dec 31

Dec 31

Equipment (2000000/1.1) GST Paid ((2000000/1.1)*1/10) Cash

454,545 163,636 1,181,819 1,818,182 181,818 2,000,000

Depreciation Expense Accumulated Dep’n – Equipment [($500,000/1.1) x 1/10- machine to be scrapped]

45,455

Accumulated Dep’n – Equipment Equipment (Equipment at 31/12/16 is now fully depreciated)

454,545


795,000

45,455

454,545

795,000

Depreciation Expense Accumulated Depreciation – Equipment

4,780,000

$46,890,910* x 1/10 $1,818,182 x 1/10 x 6/12

4,689,091 90,909 4,780,000

4,780,000

*($48,000,000 - $654,545 - $454,545) (b) 3.

King Ltd Partial Statement of Financial Position


8.35


as at 31 December 2016 Property, plant and equipment Note Land 1 Buildings Less: Accumulated depreciation – buildings Equipment 2 Less: Accumulated depreciation – equip. 3 Total property, plant and equipment

$5,327,273 $31,800,000 15,315,000 48,709,092 10,109,092

16,485,000 38,600,000 $60,412,273

Notes 1 Land: 3,600,000+2,181,818-454,545 2 Equipment: 46,890,910 + 1,818,182 3 Accumulated Depreciation: 6,000,000+21,818-283,636+45,455-454,545+4,780,000


8.36


PROBLEM SET B 8.3 Cox Ltd 2016 Jan 1

June 30

June 30

$ $ Accumulated Dep’n – Machinery Machinery (Scrapping machinery fully depreciated 31/12/15)

Dec 31

78,000

Depreciation Expense Accumulated Dep’n – Office Equipment (Update depreciation $73,500 x 1/5 x 6/12)

7,350

Cash Accumulated Depreciation – Office Equipment Gain on Disposal Office Equipment (Sale of office equipment )

30,000 51,450

Calculation of disposal Cost (1/1/2013) Accumulated Depreciation – Office Equipment [($73,500 x 1/5 x 3.5yrs)] Carrying value Cash proceeds Gain on disposal

Dec 31

78,000

Depreciation – Truck Accumulated Depreciation – Truck ( [($40,500 - $4,500) x 1/8] update depreciation) Accumulated Depreciation – Truck (5yrs) Loss on Disposal Truck (Scrapping of truck after 5 years)


7,350

7,950 73,500

$73,500 51,450 22,050 30,000 $7,950

4,500 4,500

22,500 18,000 40,500

8.37


PROBLEM SET B 8.4 Mars Ltd Year ending 30 June 2016

(a)

1/7/15

1/10/15

(b)

30/6/16

Land Buildings Cash/Payables Machinery Cash/Payables Depreciation Expense Accumulated Depreciation - Building Accumulated Depreciation - Machinery (Depreciation Building $500,000 ÷ 40 = $12,500) (Depreciation Machinery Rate

$ 1,200,000 500,000

$

1,700,000 120,000 120,000 55,700 12,500 43,200

= 1  4 9,000

120,000

= 1 - .5233 = 48% (approximately = $120,000 x 48% x 9/12 = $43,200

(c) 1/7/16

1/7/16

(d) 31/12/16

Land

200,000 Revaluation Surplus 200,000 Note: The $200,000 is considered “other comprehensive income” and would appear on the Statement of Profit and Loss and Comprehensive Income per IAS 1. Accumulated Depreciation – Building Revaluation Expense Building

12,500 25,000

Depreciation Expense Accumulated Depreciation - Machinery [($120,000 - $43,200) x 48% x 6/12]

18,432

Cost of Machinery Accumulated Depreciation ($43,200 + $18,432) Carrying amount at date of sale Proceeds Loss on disposal 31/12/16

Cash Accumulated Depreciation – Machinery Loss on Disposal Machinery


37,500

18,432

$120,000 (61,632) 58,368 50,000 $8,368 50,000 61,632 8,368 120,000

8.38


PROBLEM SET B 8.5 Fox Ltd Year ending 30 June

(a) 01/07/15

30/6/16

(b) 30/6/16

Machinery Cash (Purchase of machine)

(d) 30/6/17

$ 85,000

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (($85,000-$5,000) ÷ 8)

10,000

Impairment Loss Accumulated Impairment Loss - Machinery (Writedown of machine to recoverable amount)

14,000

Machine 30/6/16 (c) 30/6/17

$ 85,000

10,000

14,000

CV Recoverable Amt Adj $75,000 $61,000 14,000

Depreciation Expense – Machinery Accumulated Depreciation – Machinery (Depreciation ($61,000 - $5000) ÷ 7yrs remaining) Accumulated Impairment Loss - Machinery Income – Impairment Loss Reversal (Write-down of machine to recoverable amount)

8,000 8,000

12,000 12,000

Maximum reversal $85,000 – $20,000* = $65,000 *2 years of normal depreciation had the asset not been impaired. Machine CV Recoverable Amt Adj 30/6/17 $53,000** $70,000 $12,000 **$85,000 -$10,000-$8,000-$14,000= $53,000 The max reversal is to a carrying value of $65,000 Adjustment $53,000 - $65,000 = $12,000


8.39


PROBLEM SET B 8.6 Red Ltd Journal Entries 30/6/16 Land – Darwin Revaluation Surplus (Revaluation of land Darwin to $600,000)

$ 200,000

30/6/16 Revaluation Surplus Land – Perth (Revalue Land – Perth downwards to $1,000,000)

200,000

30/6/16 Accumulated Depreciation – Buildings Buildings– Perth (To close off the accumulated depreciation to asset )

150,000

Revaluation Surplus Loss on Revaluation - Building Buildings – Perth (Revalue building from $650,000 to $500,000)


$ 200,000

200,000

150,000

100,000 50,000 150,000

8.40


PROBLEM SET B 8.7 Winter Ltd Balance date 31 December (a) Year

Accumulated Depreciation 31/12

2012 2013 2014 2015

Calculation MACHINE 1 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875 $108,750 X 10% = $10,875

2013 2014 2015

MACHINE 2 $96,000 x 18.75% = $18,000 $78,000 x 18.75% = $14,625 $63,375 x 18.75% = 11,883 (rounding)

$18,000 32,625 44,508

2013 2014 2015

MACHINE 3 1,000 X $5.00a = $5,000 3,000 x $5.00 = $15,000 4,000 x $5.00 = $20,000

$5,000 20,000 40,000

$10,875 21,750 32,625 43,500

a

$50,000 ÷ 10,000 hours = $5.00 per machine hour

(b) Depreciation expense for Machine 3 in 2015 under:  Straight-line method: ($65,000-$15,000)/5 = $10,000  Diminishing-balance rate (assuming 1.5 straight-line rate) = 1.5 x 1/5 = 30% o 2013 = $65,000 x 30% = $19,500 o 2014 = ($65,000-$19,500) x 30% = $13,650 o 2015 = ($65,000-$19,500-$13.650) x 30% = $9,555  Units-of-production (from answer (a) above for 2015 = $20,000 Depreciation expense in 2015 is highest under Units-of-production method. The higher the expense, the lower the tax payment. So Units-of-production method is the preferred method for tax purposes for Machine 3 in 2015. (c) As a manager whose bonus is linked to profit, I would prefer a depreciation method that resulted in the lowest expense. From (b) above, Diminishing-balance method resulted in the lowest depreciation expense for Machine 3 in 2015. However, it should be noted that diminishing-balance method results in higher depreciation expenses in the earlier years of an asset’s life.


8.41


PROBLEM SET B 8.8 Buttercup Ltd (a) STRAIGHT-LINE DEPRECIATION Calculation Depreciable Years Cost 2015 *$270,000 2016 270,000 2017 270,000 2018 270,000 2019 270,000

X

End of Year

Depreciation Rate 20% 20% 20% 20% 20%

=

Annual Depreciation Expense $54,000 54,000 54,000 54,000 54,000

Accumulated Carrying Depreciation Amount $54,000 $256,000 108,000 202,000 162,000 148,000 216,000 94,000 270,000 40,000

* ($310,000 – $40,000)

DIMINISHING-BALANCE DEPRECIATION

Years 2015 2016 2017 2018 2019

Calculation Carrying Value Depreciation Beginning of x Rate# Year $310,000 34% 204,600 34% 135,036 34% 89,124 34% 58,822 34%

End of Year

=

Annual Depreciation Expense

Accumulated Depreciation

Carrying Amount

$105,400 174,964 220,876 251,178 270,000

$204,600 135,036 89,124 58,822 40,000

$105,400 69,564 45,912 30,302 *18,822

* Adjusted so ending carrying value will equal residual value. # Depreciation rate

= 1  5 40,000

310,000

= 1 – 0.6639 = 34% approximately

(b)

Straight-line depreciation provides the lowest amount for 2015 depreciation expense ($54,000) and, therefore, the highest 2015 profit. Diminishing-balance depreciation provides the highest amount for 2015 depreciation expense ($105,400) and, therefore, the lowest 2015 profit. Over the five-year period, both methods result in the same total depreciation expense ($270,000) and, therefore, the same total profit.


8.42


PROBLEM SET B 8.9 Future Ltd Year ended 31 December 2017 (a)

Jan 1

Patents Cash (Defence of patent)

$ 13,500

13,500

Jan Jun

Development Costs Cash (Development costs for a patent)

180,000

Jul 1

Patents Development Costs (Development costs transferred to patent granted on 1 July)

180,000

Sep 1

Oct. 1

Advertising Expense Cash (Advertising cost paid) Copyright Cash (Copyright useful life 50 years)

$

180,000

180,000

45,000 45,000

200,000 200,000

(b) Amortisation journals for year ended 31 December 2017 Dec. 31

Dec. 31

(c)

Patent Amortisation Expense 14,000 Accumulated Amortisation Patents [($80,000 x 1/10) + ($13,500 x 1/9) + ($180,000 x 1/20 x 6/12)] Copyrights Amortisation Expense Accumulated Amortisation Copyrights [($64,000 x 1/10) + ($200,000 x 1/50 x 3/12)]

Intangible Assets Patents ($273,500 cost less $22,000 amortisation) (1) Copyrights ($264,000 cost less $33,000 amortisation (2) Total intangible assets

14,000

7,400 7,400

$251,500 231,000 $482,500

(1) Cost ($80,000 + $13,500 + $180,000); Amortisation ($8,000 + $14,000) (2) Cost ($64,000 + $200,000); Amortisation ($25,600 + $7,400).

(d) The intangible assets of Future Ltd consist of two patents and two copyrights. One patent with a cost of $93,500 is being amortised over 10 years; the other patent was obtained at a cost of $180,000 and is being amortised over 20 years. A copyright with a cost of $64,000 is being amortised over 10 years; the other copyright with a cost of $200,000 is being amortised over 50 years.


8.43


PROBLEM SET B 8.10 Zhou Ltd & Wang Ltd (a)

(b)

Zhou Ltd $360,000 = 2.25 years $160,000

Wang Ltd $750,000 = 6.05 years $124,000

(1)

Average age of PPE assets

(2)

Average useful life

$1,160,000 $1,410,000 = 9.35 years =8.81 years $124,000 $160,000

(3)


$3,440,000 $3,680,000 = 1.72 times = 1.3 times $2,000,000 $2,840,000

Based on the asset turnover ratio, Wang Ltd is more effective in using assets to generate sales. Its asset turnover ratio is 30% higher than Zhou Ltd’s ratio. One factor that complicates the comparison of the asset turnovers of the two companies is the wide difference in average age of the PPE assets. Assuming the estimated useful lives are realistically measured, Wang Ltd’s assets are in need of replacement much sooner than Zhou Ltd’s (9.35-6.05 years versus 8.81-2.25 years). Another factor is the different composition of total assets for each company. For example, Zhou Ltd has recorded goodwill, but Wang Ltd does not. Deleting the goodwill from Zhou Ltd’s asset turnover ratio improves the ratio to about 1.5. Also, a much greater proportion of Zhou Ltd’s total assets consist of PPE and intangibles. Finally, we are not told which valuation models are being used. If one company uses the revaluation model and the other the cost model, the comparison would become even more problematic.


8.44


BUILDING BUSINESS SKILLS FINANCIAL REPORTING AND ANALYSIS BUILDING BUSINESS SKILLS 8.1

FINANCIAL REPORTING PROBLEM

Domino’s Pizza Enterprises Ltd (a)

At 4 July 2013 the carrying (book) value of property, plant and equipment was $49,693,000 as shown in the Statement of Financial Position Refer note 18 for details of the cost Cost $72,452,000.

(b)

Depreciation is calculated on a straight-line basis so as to write off the cost of each asset over its expected useful life to its estimated residual value. Leasehold improvements are depreciated over the period of the lease or the estimated useful life, whichever is the shorter, using the straight-line method the assets (refer to note 3.15). The estimated useful lives, residual values and depreciation method are reviewed at the end of each annual reporting period, with the effect of any changes recognised on a prospective basis.

(c)

Depreciation and amortisation expense, as disclosed in note 11.2, is 2013, $12,792,000; 2012, $10,029,000. Note 11.2 reveals depreciation expense for 2013, $ 7,869,000 and 2012, $6,938,000 and amortisation expense 2013, $4,924,000 and 2012, $3,091,000.

(d)

Additions to non-current assets. See notes 18, 19, 20: Item Plant & Equipment* Goodwill Other intangible assets

2013 $’000 30,261 13,853 8,813

2012 $’000 20,886 8,648 7,350

*Note additions include acquisitions through business combinations (e)

Note 27 and 38 disclose that the company has financial leases with present value of lease payments of $83,000 and non-cancellable operating leases for premises and motor vehicles of $74,424,000. Therefore, it appears the company mainly engages in operating leases. The split between the motor vehicles and the premises is not given. The implication for financial statement analysis is that there are assets and liabilities not disclosed in the financial statements. (Note that there is a strong movement by standard setters to include all non-cancellable leases as finance leases.)


8.45


BUILDING BUSINESS SKILLS 8.2

COMPARATIVE ANALYSIS PROBLEM CSR Ltd vs Boral Ltd

(a)

(1) Average useful life of PPE assets Average cost of PPE assets Depreciation expense

(2) Average age of PPE assets Accumulated depreciati on Depreciation expense

CSR Ltd

Boral Ltd

=

((1,403.5+1,281.7)/2)/ 85.7

((4,607.9+4,594.7)/2)/ 263.5

=

15.67 years

17.46 years

702.0/85.7

2,627.6/263.5

8.2 years

10 years

=

1,682.5/((2,032.7+2,2 45.5)/2)

5,209.4/((6,316.4+6,4 99.1)/2)

=

0.787 times

0.813 times

=

= = =

(3) Asset turnover ratio Net sales Average total assets

(b)

=

The average useful life and the average age of PPE assets are useful to compare these ratios with averages of other companies in the same industry. CSR’s and Boral’s PPE assets have been used for 8.2 years and 10 years respectively. CSR’s PPE assets have a shorter estimated life than Boral’s PPE assets. The remaining estimated life of CSR’s PPE assets is 7.47 years (15.67 - 8.2), while Boral’s PPE assets have a remaining estimated life of 7.46 years (17.46 - 10). So on average both entities have similar aged assets. The asset turnover ratio measures how efficiently a company uses its assets to generate sales. It shows the dollars of sales generated by each dollar invested in assets. CSR’s asset turnover ratio is 0.787 times and Boral’s 0.813 times. Therefore, it can be concluded that Boral is slightly more efficient in usage of assets.


8.46



COMPARATIVE ANALYSIS PROBLEM

Meds4U Ltd and Hope Ltd (a)

The primary intangibles of a healthcare products company would probably be patents, goodwill and trademarks. The nature of each of these is quite different; thus an investor would normally want to know what the composition of intangible assets is if it is material. If all intangibles were classified as goodwill then investors would be concerned as they would expect to see the company recognising patents from their development expenditures.

(b)

The asset turnover ratio is calculated as net sales divided by average total assets. This would be calculated as follows for these two companies:

Meds4U Ltd $47,314 =0.89 ($54,422  $51,472)  2

Hope Ltd. $53,796 = 1.01 ($63,706 + $42,906)  2

This suggests that Hope Ltd is slightly more effective in using its assets to generate sales. (c)

Many corporate executives complain that investors are too concerned about the short-term and don’t reward good long-term planning. As a consequence, they feel that the requirement that research and development expenditures be expensed immediately penalises those executives who do invest in the future. As a consequence, when profit does not look good, it is always tempting to cut research and development expenditures, since this will cause a direct increase in current year reported profits. Of course, it will also diminish the company’s long-term prospects.

(d)

If an entity reports goodwill on its statement of financial position, it can only have resulted from one thing – the entity must have purchased another entity. This is because entities are not allowed to record internally created goodwill. They can only report purchased goodwill. Ironically, if you want to report a large amount of goodwill, all you have to do is overpay when you purchase another business – the more you overpay, the more goodwill you will report. Obviously, reporting a lot of goodwill is not such a good thing. There is an asset impairment test which requires an entity to test annually for the impairment of goodwill.


8.47



FINANCIAL ANALYSIS ON THE WEB

The answer to this question will vary on the company the student selects. Try and encourage students within the class to select different industries to be examined and then the class discussion can also focus on the differences between industries.


8.48


CRITICAL THINKING BUILDING BUSINESS SKILLS 8.5

COMMUNICATION ACTIVITY

The CEO would be arguing for recognising the internally generated intangibles. The IASB member would be arguing for the IAS 38 rule which prohibits the recognition of internally generated brands, mastheads, publishing titles, customer lists and items similar in substance. Format of the short report. This should be set out in the style required in your ing course. This may differ slightly from class to class but in general it should include the following elements: Headings Title To From Date Re (what the report is about) Introduction Discussion Conclusion Recommendations You should use some sort of numbering system whether alphanumeric or not.

Some of the issues to be raised in the report: 1. One of the primary underlying principals in ing is that the transaction or event needs to be clearly identified. Expenditures on internally generated assets, such as brands, mastheads, publishing titles and customer lists, may not be recognised as an asset because the costs incurred are considered indistinguishable from expenditure incurred to develop the business as a whole (internally generated goodwill). This is specifically mentioned in IAS 38 paragraph 64 which states that expenditure on internally generated brands, mastheads, publishing titles, customer lists and items similar in substance cannot be distinguished from the cost of developing the business as a whole. Therefore, such items are not recognised as intangible assets. 2. One of the issues is how to measure the internally generated intangibles. They are treated in a similar vein to the internally generated goodwill and IAS 38 imposes the restriction of only recognising the item when it is purchased. This restriction has been imposed on the basis of the uncertainty surrounding the value of internally generated goodwill. It is difficult to audit the value assigned to these assets. 3. The IASB framework as such does not prohibit the recognition of the internally generated intangibles. The recognition of an asset would not be dependent upon the requirement that the future economic benefit be purchased, only that it be controlled. The CEO would argue strongly that the value of the intangible can be reliably measured. If other entities can purchase these types of assets then they must be able to be measured.


8.49


4. There is international controversy regarding the treatment of goodwill. The argument for amortisation is that a company pays a for the future earning capacity of the entity it purchased and this is realised over time and as such should be amortised against the future earnings. The counter argument is that the paid is for the synergies of the new earning capacity of the investor and investee companies and, as such, it should only be written down or amortised if the asset is impaired. The current standard on goodwill does not require amortisation, but an impairment test. 5. The main issue at hand is that there is an inconsistency if you wish to compare the performance of two entities which are structured differently. Company A may have grown internally and developed intangibles which are valuable and vital to the company’s performance. Company B may have grown by purchasing other business entities and as such have identified and recognised on their statement of financial position various intangible assets. The issue is how Company A can communicate to the market that they are strong performers. One side issue is that if the assets are not recognised in Company A then their return on assets will look superior to that of Company B who has more assets recognised on their statement of financial position.


8.50



ETHICS CASE Glass Ltd

(a)

The stakeholders in this situation are:  Angela Smith, managing director of Glass Ltd  Jonty Upright, ant  The shareholders of Glass Ltd  Potential investors in Glass Ltd

(b)

The intentional misstatement of the life of an asset or the amount of the residual value is unethical for whatever the reason. There is nothing unethical per se about changing the estimate either of the life of an asset or of an asset’s residual value if the change is an attempt to improve the allocation of the asset’s depreciable cost over the asset’s useful life. In this case, it appears from the ant’s reaction that the revisions in the useful life and residual value are intended only to improve earnings which would be unethical. The fact that the competition uses a longer life on its equipment is not necessarily relevant. The competition’s maintenance and repair policies and activities may be different. The competition may use its equipment fewer hours a year (e.g. one shift rather than two shifts daily) than Glass Ltd.

(c)

Profit (ignoring income tax) in the year of change is increased $400,000 implementing the managing director’s proposed changes.

Asset cost Estimated residual Depreciable amount Depreciation per year ($6,400,000 ÷ 8)

Asset cost Estimated residual Depreciable amount Depreciation taken to date ($800,000 x 2)

Remaining life in years Depreciation per year Change in depreciation $800,000 - $400,000=


Old Estimates $7,000,000 600,000 6,400,000 $800,000 Revised Estimates $7,000,000 600,000 6,400,000 1,600,000 $4,800,000 12years $400,000 $400,000

8.51



GROUP DECISION CASE

Auckland Ltd & Wellington Ltd (a) Auckland: Straight-line method Annual Depreciation Building [($460,000 - $60,000) x 2%*] Equipment [($200,000 - $15,000) x 12.5%**] Total annual depreciation

$8,000 23 125 $31 125

Total accumulated depreciation ($31,125 x 3)

$93 375

* (100% ÷ 50 years) = 2% **(100% ÷ 8 years) = 12.5% Wellington Ltd: diminishing-balance method at double the straight line. Year 2015 2016 2017

Depreciation @ 4%* Depreciation @ 25%** Total Depreciation 18,400 50,000 68,400 17,664 37,500 55,164 16,957 28,125 45,082 168,646 * (100% ÷ 50 years) = 2%* 2 **(100% ÷ 8 years) = 12.5%*2

(b)

Year 2015 2016 2017 Total profit

(c)

Auckland Ltd Profit $126,000 123,800 117,500 $367,300

Wellington Ltd Profit as Adjusted $139,275 138,039 141,457 $418,771

Calculation for Wellington Ltd $102,000 + $68,400 - $31,125 = $139,275 $114,000 + $55,164 - $31,125= $138,039 $127,500 + $45,082 - $31,125 = $141,457

As shown above, when the two companies use the same depreciation method, Wellington Ltd is more profitable than Auckland Ltd. When the two companies are using different depreciation methods, Wellington Ltd has more cash than Auckland Ltd for two reasons: 1. its earnings are generating more cash than the earnings of Auckland Ltd, and 2. depreciation expense has no effect on cash. Cash generated by operations can be arrived at by adding depreciation expense to profit. If this is done, it can be seen that Wellington Ltd’s operations generate more cash ($343,500 + $168,646 = $512,146) than Auckland Ltd’s ($367,300 + $93,375 = $460,675). Based on the above analysis, Ms James should invest in Wellington Ltd. Not only is it in a better cash financial position than Auckland Ltd, but it is also more profitable.


8.52



SUSTAINABILITY

Fonterra Co-operative Group sustainability 1. The term sustainability is about making sure the social, economic and environmental needs of our community are met and kept healthy for future generations. Sustainable development must not just be about economic growth but also environmental quality and social equity. Corporate social responsibility (CSR) for business means companies must be aware and have a core understanding of CSR characteristics; an understanding of the basic issues and how they may affect decision making; to be able to apply this basic knowledge with competence to specific activities; and have strategic alignment ie have an in depth understanding of the issues and possess the expertise to embed CSR principles into the business decision making process. 2. Fonterra’s latest sustainability report. The answer will change here depending on which year the sustainability report is accessed. The following is the link to the website where the report can be ed: http://www.fonterra.com/. Once the site is accessed, click on sustainability or search the site for sustainability. The students are required to report on: goals, measurement and achievement in  Water  Waste  Resources- and energy use, and  Climate change 3. Climate change can affect asset values either directly e.g. through rising water levels, floods, erosion, droughts etc. damaging land and buildings, leading to asset impairments, or indirectly through changing demands for products and thus the production facilities required for their manufacture. It could also provide new opportunities for capital investment.


8.53

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