Question

1. (A) On 1 January 2017, Kidal Limited purchased a machine at a cost of $350,000 by signing a note payable of $300,000. The remaining $50,000 was paid by cash. The useful life of the machine was estimated to be 5 years with a residual value of $50,000. The machine was expected to produce 200,000 units of products over its 5-year useful life.

   For the years 2017 and 2018, the machine had produced 50,000 units and 80,000 units of products respectively. The accounting year of Kidal Limited ends on 31 December.

   (B) On 1 January 2018, Leo Limited purchased a motor vehicle for $140,000. It had been depreciated using the straight-line method based on an estimated residual value of $20,000 and an estimated useful life of 5 years. On 31 July 2019, the motor vehicle was sold for $90,000 cash. The accounting year of Leo Limited ends on 31 December.

   1. (a) Compute the depreciation expense of the motor vehicle for the year 2018.

   2. (b) Compute the depreciation expense of the motor vehicle for the year 2019 up to the date of disposal on 31 July 2019. (1 mark)

   3. (c) Prepare journal entry to record the disposal of the motor vehicle on 31 July 2019.

2. Required:

(Note: Narration is not required.)

Answer 1

Part A
Depreciation per unit =($350,000 - $50,000) / 200,000 units =$1.50 per unit
Depreciation for 2017 =50,000 units * $1.50 per unit =$75,000
Depreciation for 2018 =80,000 units * $1.50 per unit =$120,000
Date	Account explanation	Debit	Credit
Jan 1,2017	Machine	$3,50,000
	Notes Payable		$3,00,000
	Cash		$50,000
Dec 31,2017	Depreciation expenses	$75,000
	Accumulated Depreciation-Machine		$75,000
Part B
Depreciation expense for 2018 =($140,000 - $20,000) / 5 Years =$24,000
Depreciation expense for 2019(for 7 months) =$24,000*7/12 =$14,000
Date	Account explanation	Debit	Credit
July 31,2019	Cash	$90,000
	Accumulated Depreciation-Equipment	$38,000
	Loss on sale of Equipment	$12,000
	Equipment		$1,40,000