Methods of Derecognizing Sample Assignment

Methods of derecognizing a non-current asset

Deduhin Ltd acquired two new machines for cash on 1 January 2014. The cost of machine A was $400 000, and of machine B, $600 000. Each machine was expected to have a useful life of 10 years, and residual values were estimated at $20 000 for machine A and $50 000 for machine B.

Because of technological advances, Deduhin Ltd decided to replace machine A. It traded in machine A on 31 March 2018 for a new machine, C, which cost $420 000. A $200 000 trade-in was allowed for machine A, and the balance of machine C’s cost was paid in cash. Machine C was expected to have a useful life of 8 years and a residual value of $20 000.

On 2 July 2018, extensive repairs were carried out on machine B for $66 000 cash. Deduhin Ltd expected these repairs to extend machine B’s useful life by 4 years and it revised machine B’s estimated residual value to $19 500. Machine B was eventually sold on 1 April 2020 for $300 000 cash.

Deduhin Ltd uses the straight-line depreciation method, recording depreciation to the nearest whole month. The end of the reporting period is 30 June.

Required

  1. Prepare general journal entries to record the above transactions and depreciation journal entries required at the end of each reporting period up to 30 June 2020.
  2. Prepare the following ledger accounts for the period 1 January 2014 to 1 July 2020:
  • Machinery
  • Accumulated Depreciation – Machinery

DEDUHIN LTD

General Journal

2014

Jan 1

Machinery

1 000 000

Cash at Bank

1 000 000

Purchase of machines A and B.

June 30

Depreciation Expense – Machinery

46 500

Accum. Depreciation – Machinery

46 500

Depreciation of machines A and B.

Mach A: (400 000 – 20 000)/10 ´ ½  = $19 000

Mach B: (600 000 – 50 000)/10 ´ ½ = $27 500

2015

June 30

Depreciation Expense – Machinery

93 000

Accum. Depreciation – Machinery

93 000

Depreciation of machines A and B.

Mach A: (400 000 – 20 000)/10 = $38 000

Mach B: (600 000 – 50 000)/10 = $55 000

2016

June 30

Depreciation Expense – Machinery

93 000

Accum. Depreciation – Machinery

93 000

Depreciation of machines A and B.

2017

June 30

Depreciation Expense – Machinery

93 000

Accum. Depreciation – Machinery

93 000

Depreciation of machines A and B.

2018

Mar. 31

Depreciation Expense – Machinery

28 500

Accum. Depreciation – Machinery

28 500

Depreciation of machine A to date of sale.

Mach A: $38 000 ´ 9/12 =$28 500

Mar 31

Machinery [C]

420 000

Cash at Bank

220 000

Proceeds on Sale of Machine

200 000

Trade-in machine A for Machine C.

Carrying Amount of Machine Sold

238 500

Accumulated Depreciation – Machinery

161 500

Machinery

400 000

Write off machine traded in.

$161 500 = ($38 000 ´ 3) + 19 000 + 28 500

June 30

Depreciation Expense – Machinery

67 500

Accum. Depreciation – Machinery

67 500

Depreciation of machines B and C.

Mach B: $55 000

Mach C: ($420 000 – 20 000)/8 ´ ¼ = $12 500

July 2

Accumulated Depreciation – Machinery

247 500

Machinery [B]

247 500

Write back accumulated depreciation on machine B on overhaul.

Machinery [B]

66 000

Cash at Bank

66 000

Overhaul of machine B.

New carrying amount of machine B

= 600 000 – 247 500 + 66 000 = $418 500

Remaining useful life is now 9½ years

2019

30 June

Depreciation Expense – Machinery

92 000

Accum. Depreciation – Machinery

92 000

Depreciation of machines B and C.

Mach B: ($418 500 – 19 500) ÷ 9½ = 42 000

Mach C: ($420 000 – 20 000) /8  = 50 000

2020

April 1

Depreciation Expense – Machinery

31 500

Accum. Depreciation – Machinery

31 500

Depreciation of machine B before sale.

($418 500 – 19 500)÷ 9½ ´ 9/12= 31 500

April 1

Cash at Bank

300 000

Proceeds on Sale of Machine

300 000

Sale of machine B.

Carrying Amount of Machine Sold

345 000

Accumulated Depreciation – Machinery

73 500

Machinery

418 500

Write off  machine B.

 

$73 500 =  42 000 + 31 500

June 30

Depreciation Expense – Machinery

50 000

Accum. Depreciation – Machinery

50 000

Depreciation of machine C.

The following accounts (in T account format) should be balanced at least on a yearly basis but have not been on the grounds of simplicity.

Machinery

1/1/14

Cash at bank

$1 000 000

1/4/18

Carrying amount

400 000

31/3/18

Cash and proceeds on sale

420 000

2/7/18

Accum. depreciation

247 500

2/7/18

Cash at bank

66 000

1/4/20

Carrying amount

418 500

30/6/20

Balance c/d

420 000

1 486 000

1 486 000

1/7/20

Balance b/d

420 000

Accumulated Depreciation – Machinery

1/4/18

Carrying amount and machinery.

$161 500

30/6/14

Depreciation

$46 500

2/7/18

Machinery

247 500

30/6/15

Depreciation

93 000

1/4/20

Carrying amount and machinery

73 500

30/6/16

Depreciation

93 000

30/6/17

Depreciation

93 000

31/3/18

Depreciation

28 500

30/6/18

Depreciation

67 500

30/6/19

Depreciation

92 000

1/4/20

Depreciation

31 500

30/6/20

Balance c/d

112 500

30/6/20

Depreciation

50 000

595 000

595 000

1/7/20

Balance b/d

112 500

Revaluation, depreciation, disposal

On 1 January 2014, 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

  1. Record the purchase of the trucks on 1 January 2014.
  2. Record the depreciation expense on the trucks for 2019.
  3. Assume that early in 2020 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 2020.
  4. Make the necessary entries to record the sale of one of the machines on 31 December 2020. 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.)
  5. 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?

2014

Jan. 1

Machinery

700 000

GST Receivable

70 000

Cash at Bank

770 000

Purchase of two machines.

2019

Depreciation – Machinery

60 000

31 Dec

Accumulated Depreciation – Machinery

60 000

Depreciate trucks ([$700 000 – $100 000] ¸ 10)

2020

Jan

Accumulated Depreciation – Machinery

360 000

Machinery

360 000

Write back accumulated depreciation on revaluation $60 000 ´ 6

Machinery

160 000

Gain on Revaluation – Machinery (OCI)

160 000

Revalue Machinery.

OR

Accumulated Depreciation – Machinery

360 000

Machinery

200 000

Gain on Revaluation – Machinery (OCI)

160 000

(i.e. previous two entries combined.)

Dec. 31

Depreciation Expense – Machinery

70 000

Accumulated Depreciation – Machinery

70 000

Depreciate trucks. ([$500 000* – $80 000] ¸ 6)

 

*$500,000 = $700,000 -$360,000+160,000

  

Dec. 31

Cash at Bank

220 000

GST Payable

20 000

Proceeds from Sale of Machinery

200 000

Sale of machine.

Carrying Amount of Machinery Sold

215 000

Accumulated Depreciation – Machinery

35 000

Machinery

250 000

Write off machine sold.

Early 2020 value of one machine = $250k.

Depreciation $35k/year.

31/12/2020 $250K-35k=$215k

31/12/2021 $215k-35k=$180k

31/12/2022 $180k-35k=$145k

31/12/2023 $145k-35k=$110k

31/12/2024 $110k-35k=$75k

31/12/2025 $75K-25K=$50K

Depreciation in year ended 31/12/2025 is $25k to leave a residual of $50k.