Exercises STAR RATING ★ BASIC ★★ MODER ATE ★★★ DIFFICULT

Exercise 11.15 DECLINE IN VALUE OF ASSETS

★ A new accountant has been appointed to the firm of Gutenberg Ltd, which owns a large number of depre-
ciable assets. Upon analysing the firm’s depreciation policy, the accountant has implemented a new policy
based on the principle that the depreciation rate for particular assets should measure the decline in the
value of the assets. Discuss this policy change.

Exercise 11.16 DEPRECIATION CHARGES

★ The management of Carlsberg Ltd has been analysing the financial reports provided by the accountant,
who has been with the firm for a number of years. Management has expressed its concern over deprecia-
tion charges being made in relation to the company’s equipment. In particular, it believes that the depreci-
ation charges are not high enough in relation to the factory machines because new technology applied in
that area is rapidly making the machines obsolete. Management’s concern is that the machines will have
to be replaced in the near future and, with the low depreciation charges, the fund will not be sufficient to
pay for the replacement machines. Discuss.

Exercise 11.17 REVALUATION OF ASSETS

★ On 30 June 2014, the statement of financial position of Meezen Ltd showed the following non-current
assets after charging depreciation:

Building $ 300 000

Accumulated Depreciation (100 000) $200 000
Motor Vehicle 120 000
Accumulated Depreciation (40 000) 80 000

The company has adopted fair value for the valuation of non-current assets. This has resulted in the
recognition in previous periods of an asset revaluation surplus for the building of $14 000. On 30 June
2014, an independent valuer assessed the fair value of the building to be $160 000 and the vehicle to be
$90 000. The income tax rate is 30%.
Required
1. Prepare any necessary entries to revalue the building and the vehicle as at 30 June 2014.
2. Assume that the building and vehicle had remaining useful lives of 25 years and 4 years respectively,
with zero residual value. Prepare entries to record depreciation expense for the year ended 30 June 2015
using the straight-line method.

Exercise 11.18 BUILDING COSTS

★★ Chua Ltd has acquired a new building. Which of the following items should be included in the cost of the
building?
(a) Stamp duty
(b) Real estate agent’s fees
(c) Architect’s fees for drawings for internal adjustments to the building to be made before use
(d) Interest on the bank loan to acquire the building, and an application fee to the bank to get the loan,
which is secured on the building
(e) Cost of changing the name on the building
(f) Cost of changing the parking bays
(g) Cost of refurbishing the lobby to the building to attract customers and make it more user friendly

Exercise 11.19 CAPITALISATION

★★ Rennau Ltd has acquired a new machine, which it has had installed in its factory. Which of the following
items should be capitalised into the cost of the building?
(a) Labour and travel costs for managers to inspect possible new machines and for negotiating for a new
machine
(b) Freight costs and insurance to get the new machine to the factory
(c) Costs for renovating a section of the factory, in anticipation of the new machine’s arrival, to ensure that
all the other parts of the factory will have easy access to the new machine
(d) Cost of cooling equipment to assist in the efficient operation of the new machine

CHAPTER 11 Property, plant and equipment 1

 (e) Costs of repairing the factory door, which was damaged by the installation of the new machine
(f) Training costs of workers who will use the machine

Exercise 11.20 DEPRECIATION CALCULATION

★★ On 1 July 2014, Bergfeld Airlines acquired a new aeroplane for a total cost of $10 million. A breakdown of
the costs to build the aeroplane was given by the manufacturers:

Aircraft body $ 3 000 000

Engines (2) 4 000 000
Fitting out of aircraft:
Fitting out of aircraft:
Seats 1 000 000
Carpets 50 000
Electrical equipment — passenger seats 200 000
— cockpit 1 500 000
Food preparation equipment 250 000

All costs include installation and labour costs associated with the relevant part.
It is expected that the aircraft will be kept for 10 years and then sold. The main value of the aircraft
at that stage is the body and the engines. The expected selling price is $2.1 million, with the body and
engines retaining proportionate value.
Costs in relation to the aircraft over the next 10 years are expected to be as follows:
(a) Aircraft body. This requires an inspection every 2 years for cracks and wear and tear, at a cost of $10 000.
(b) Engines. Each engine has an expected life of 4 years before being sold for scrap. It is expected that the
engines will be replaced in 2018 for $4.5 million and again in 2022 for $6 million. These engines are
expected to incur annual maintenance costs of $300 000. The manufacturer has informed Bergfeld
Airlines that a new prototype engine with an extra 10% capacity should be on the market in 2020, and
that existing engines could be upgraded at a cost of $1 million.
(c) Fittings. Seats are replaced every 3 years. Expected replacement costs are $1.2 million in 2017 and
$1.5 million in 2023. The repair of torn seats and faulty mechanisms is expected to cost $100 000
p.a. Carpets are replaced every 5 years. They will be replaced in 2019 at an expected cost of $65 000,
but will not be replaced again before the aircraft is sold in 2021. Cleaning costs amount to $10 000
p.a. The electrical equipment (such as the TV) for each seat has an annual repair cost of $15 000. It is
expected that, with the improvements in technology, the equipment will be totally replaced in 2020 by
substantially better equipment at a cost of $350 000. The electrical equipment in the cockpit is tested
frequently at an expected annual cost of $250 000. Major upgrades to the equipment are expected every
2 years at expected costs of $250 000 (in 2013), $300 000 (in 2015), $345 000 (in 2017) and $410 000
(in 2022). The upgrades will take into effect the expected changes in technology.
(d) Food preparation equipment. This incurs annual costs for repair and maintenance of $20 000. The equip-
ment is expected to be totally replaced in 2020.

Required
1. Discuss how the costs relating to the aircraft should be accounted for.
2. Determine the expenses recognised for the 2014–15 financial year.

Exercise 11.21 ACQUISITIONS, DISPOSALS, DEPRECIATION

★★ Meerbeck Ltd purchased equipment on 1 July 2013 for $39 800 cash. Transport and installation costs of
$4200 were paid on 5 July 2013. Useful life and residual value were estimated to be 10 years and $1800
respectively. Meerbeck Ltd depreciates equipment using the straight-line method to the nearest month,
and reports annually on 30 June. The company tax rate is 30%.
In June 2015, changes in technology caused the company to revise the estimated total life from 10 years
to 5 years, and the residual value from $1800 to $1200. This revised estimate was made before recording
the depreciation for the financial year ended 30 June 2015.
On 30 June 2015, the company adopted the revaluation model to account for equipment. An expert
valuation was obtained showing that the equipment had a fair value of $30 000 at that date.
On 30 June 2016, depreciation for the year was charged and the equipment’s carrying amount was
remeasured to its fair value of $16 000.
On 30 September 2016, the equipment was sold for $8400 cash.

2 PART 2 Elements
 Required
(Show all workings and round amounts to the nearest dollar.)
Prepare general journal entries to record the transactions and events for the period 1 July 2013 to 30 Sep-
tember 2016. (Narrations are not required.)

Exercise 11.22 CLASSIFICATION OF ACQUISITION COSTS

★★ Alsbach Ltd began operations on 1 July 2016. During the following year, the company acquired a tract of
land, demolished the building on the land and built a new factory. Equipment was acquired for the factory
and, in March 2017, the factory was ready. A gala opening was held on 18 March, with the local parlia-
mentarian opening the factory. The first items were ready for sale on 25 March.
Required
Using the information provided, determine what assets Alsbach Ltd should recognise and the amounts at
which they would be recorded.

Exercise 11.23 ACQUISITIONS, REVALUATIONS, REPLACEMENTS, DEPRECIATION

★★ Hamburg Trading operates in a very competitive field. To maintain its market position, it purchased two
new machines for cash on 1 January 2013. It had previously rented its machines. Machine A cost $40 000
and Machine B cost $100 000. Each machine was expected to have a useful life of 10 years, and residual
values were estimated at $2000 for Machine A and $5000 for Machine B.
On 30 June 2014, Hamburg Trading adopted the revaluation model to account for the class of machinery.
The fair values of Machine A and Machine B were determined to be $32 000 and $90 000 respectively on
that date. The useful life and residual value of Machine A were reassessed to 8 years and $1500. The useful
life and residual value of Machine B were reassessed to 8 years and $4000.
On 2 January 2015, extensive repairs were carried out on Machine B for $66 000 cash. Hamburg Trading
expected these repairs to extend Machine B’s useful life by 3.5 years, and it revised Machine B’s estimated
residual value to $9450.
Owing to technological advances, Hamburg Trading decided to replace Machine A. It traded in Machine
A on 31 March 2015 for new Machine C, which cost $64 000. A $28 000 trade-in was allowed for Machine A,
and the balance of Machine C’s cost was paid in cash. Transport and installation costs of $950 were incurred
in respect to Machine C. Machine C was expected to have a useful life of 8 years and a residual value of $8000.
Hamburg Trading uses the straight-line depreciation method, recording depreciation to the nearest
month and the nearest dollarpound. The end of its reporting period is 30 June.
On 30 June 2015, fair values were determined to be $140 000 and $65 000 for Machines B and C
respectively.
Required
Prepare general journal entries to record the above transactions and the depreciation journal entries required
at the end of each reporting period up to 30 June 2013. (Narrations are not required but show all workings.)

Exercise 11.24 DEPRECIATION CALCULATION

★★★ Osamu Ltd operates a factory that contains a large number of machines designed to produce knitted
garments. These machines are generally depreciated at 10% p.a. on a straight-line basis. In general,
machines are estimated to have a residual value on disposal of 10% of cost. At 1 July 2013, Osamu Ltd
had a total of 64 machines, and the statement of financial position showed a total cost of $420 000 and
accumulated depreciation of $130 000. During 2013–14, the following transactions occurred:
(a) On 1 September 2013, a new machine was acquired for $15 000. This machine replaced two other
machines. One of the two replaced machines was acquired on 1 July 2010 for $8200. It was traded
in on the new machine, with Osamu Ltd making a cash payment of $8800 on the new machine. The
second replaced machine had cost $9000 on 1 April 2011 and was sold for $7300.
(b) On 1 January 2014, a machine that had cost $4000 on 1 July 2004 was retired from use and sold for
scrap for $500.
(c) On 1 January 2014, a machine that had been acquired on 1 January 2011 for $7000 was repaired
because its motor had been damaged from overheating. The motor was replaced at a cost of $4800. It
was expected that this would increase the life of the machine by an extra 2 years.
(d) On 1 April 2014, Osamu Ltd fitted a new form of arm to a machine used for putting special designs
onto garments. The arm cost $1200. The machine had been acquired on 1 April 2011 for $10 000. The
arm can be used on a number of other machines when required and has a 15-year life. It will not be
sold when any particular machine is retired, but retained for use on other machines.

CHAPTER 11 Property, plant and equipment 3

 Required
1. Record each of the transactions. The end of the reporting period is 30 June.
2. Determine the depreciation expense for Osamu Ltd for 2013–14.

Exercise 11.25 DEPRECIATION

★★★ Springs Manufacturing, which started operations on 1 September 2010, is owned by Alice Ltd. Alice Ltd’s
accounts at 31 December 2013 included the following balances:

Machinery (at cost) $91 000

Accumulated Depreciation – Machinery (48 200)
Vehicles (at cost; purchased 21 November 2012) 46 800
Accumulated Depreciation – Vehicles (19 656)
Land (at cost; purchased 25 October 2010) 81 000
Building (at cost; purchased 25 October 2010) 185 720
Accumulated Depreciation – Building (28 614)

Details of machines owned at 31 December 2013 are as follows:

Machine Purchase date Cost Useful life Residual value

1 7 October 2010 $43 000 5 years $2 500

2 4 February 2011 $48 000 6 years $3 000

Additional information
(a) Alice Ltd calculates depreciation to the nearest month and balances the records at month-end. Recorded
amounts are rounded to the nearest dollar, and the end of the reporting period is 31 December.
(b) Alice Ltd uses straight-line depreciation for all depreciable assets except vehicles, which are depreciated
on the diminishing balance at 40% p.a.
(c) The vehicles account balance reflects the total paid for two identical delivery vehicles, each of which
cost $23 400.
(d) On acquiring the land and building, Alice Ltd estimated the building’s useful life and residual value at
20 years and $5000 respectively.
The following transactions occurred from 1 January 2014:

2014
Jan. 3 Bought a new machine (Machine 3) for a cash price of $57 000. Freight charges of $442
and installation costs of $1758 were paid in cash. The useful life and residual value were
estimated at 5 years and $4000 respectively.
June 22 Bought a second-hand vehicle for $15 200 cash. Repainting costs of $655 and four new tyres
costing $345 were paid for in cash.
Aug. 28 Exchanged Machine 1 for office furniture that had a fair value of $12 500 at the date of
exchange. The fair value of Machine 1 at the date of exchange was $11 500. The office
furniture originally cost $36 000 and, to the date of exchange, had been depreciated by
$24 100 in the previous owner’s books. Alice Ltd estimated the office furniture’s useful life and
residual value at 8 years and $540 respectively.
Dec. 31 Recorded depreciation.

2015
April 30 Paid for repairs and maintenance on the machinery at a cash cost of $928.
May 25 Sold one of the vehicles bought on 21 November 2012 for $6600 cash.
June 26 Installed a fence around the property at a cash cost of $5500. The fence has an estimated
useful life of 10 years and zero residual value. (Debit the cost to a land improvements asset
account.)
Dec. 31 Recorded depreciation.

4 PART 2 Elements
 2016
June 20 Traded in the remaining vehicle bought on 21 November 2012 for a new vehicle. A trade-
in allowance of $3700 was received and $22 000 was paid in cash. Stamp duty of $500 and
registration and third-party insurance of $800 were also paid for in cash.
Dec. 31 Recorded depreciation.

Required
Prepare general journal entries to record the above transactions.

Exercise 11.26 DEPRECIATION

★★★ Chorin Ltd started operations on 1 October 2010. Its accounts at 30 June 2013 included the following balances:

Machinery (at cost) $98 000

Accumulated Depreciation – Machinery (47 886)
Vehicles (at cost; purchased 20 February 2011) 160 000
Accumulated Depreciation – Vehicles (89 440)
Land (at cost; purchased 20 March 2013) 75 000
Building (at cost; purchased 20 March 2013) 290 600
Accumulated Depreciation – Building (3 420)
Land Improvements (at cost; purchased 20 March 2013) 18 000
Accumulated Depreciation – Land Improvements (300)

Details of machines owned at 30 June 2013 were:

Machine Purchase date Cost Useful life Residual value

1 2 October 2010 $25 000 4 years $2 500

2 27 December 2010 42 000 5 years 4 000
3 29 July 2011 31 000 4 years 3 000

Additional information
(a) Chorin Ltd calculates depreciation to the nearest month and balances the records at month-end.
Recorded amounts are rounded to the nearest dollar, and the end of the reporting period is 30 June.
(b) Chorin Ltd uses straight-line depreciation for all depreciable assets except vehicles, which are depreci-
ated on the diminishing balance at 30% p.a.
(c) The Vehicles account balance reflects the total paid for four identical delivery vehicles, which cost
$40 000 each.
(d) On acquiring the land and building, Chorin Ltd estimated the building’s useful life and residual value
at 20 years and $17 000 respectively.
(e) The Land Improvements account balance reflects a payment of $18 000 made on 20 March 2013 for
driveways and a car park. On acquiring these land improvements, Chorin Ltd estimated their useful life
at 15 years with no residual value.
The following transactions occurred from 1 July 2013:

2013
Aug. 3 Purchased a new machine (Machine 4) for a cash price of $36 000. Installation costs of
$1800 were also paid. Chorin Ltd estimated the useful life and residual value at 5 years and
$3500 respectively.
Nov. 15 Paid vehicle repairs of $600.
Dec. 30 Exchanged one of the vehicles for items of fixtures that had a fair value of $17 000 at
the date of exchange. The fair value of the vehicle at the date of exchange was $16 000.
The fixtures originally cost $50 000 and had been depreciated by $31 000 to the date of
exchange in the previous owner’s books. Chorin Ltd estimated the fixtures’ useful life and
residual value at 5 years and $2500 respectively.

2014
March 10 Sold Machine 1 for $5000 cash.
June 30 Recorded depreciation expense.
(continued)

CHAPTER 11 Property, plant and equipment 5

 Sept. 20 Traded in Machine 3 for a new machine (Machine 5). A trade-in allowance of $10 000 was
received for Machine 3 and $34 000 was paid in cash. Chorin Ltd estimated Machine 5’s
useful life and residual value at 6 years and $5000 respectively.
Dec. 30 Scrapped Machine 2, as it was surplus to requirements and no buyer could be found for it.

2015
Feb. 8 Paid $8000 to overhaul Machine 4, after which Machine 4’s useful life was estimated at 2
remaining years and its residual value was revised to $5000.
June 30 Recorded depreciation expense.

Required
Prepare general journal entries to record the above transactions.

6 PART 2 Elements