Question

‘X’ Ltd. purchased two new machines for cash on 1 January 2018. Machine A cost $4000 and Machine B cost $10000. Each machine was expected to have a useful life of 10 years, and residual values were estimated at $200 for Machine A and $500 for Machine B.

On 30 June 2019, ‘X’ Ltd. adopted the revaluation model to account for the class of machinery. The fair values of Machine A and Machine B were determined to be $3200 and $9000 respectively on that date. The useful life and residual value of Machine A were reassessed to 8 years and $150. The useful life and residual value of Machine B were reassessed to 8 years and $400.

On 2 January 2020, extensive repairs were carried out on Machine B for $6600 cash. ‘X’ Ltd. expected these repairs to extend Machine B’s useful life by 3.5 years, and it revised Machine B’s estimated residual value to $945.

‘X’ Ltd. decided to replace Machine A. It traded in Machine A on 31 March 2020 for new Machine C, which cost $6400. A $2800 trade-in was allowed for Machine A, and the balance of Machine C’s cost was paid in cash. Transport and installation costs of $95 were incurred in respect to Machine C. Machine C was expected to have a useful life of 8 years and a residual value of $800.

‘X’ Ltd. uses the straight-line depreciation method, recording depreciation to the nearest month and the nearest dollar. The end of its reporting period is 30 June.

On 30 June 2020, fair values were determined to be $14000 and $6500 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 2020. Please show all the required calculations as note at the end of your answer.

Answer 1

Date	Particulars	Amount $	Amount $
01.01.2018	Machine A   Dr	4000
	Machine B   Dr	10000
	To Cash		14000
	( being machineA & B purchased for cash)
30.06.2018	Depreciation A/c                         Dr	665
	To Machine A		190
	To Machine B		475
	( being depreciation charged)
30.06.2018	Profit & loss account                  Dr	665
	To Depreciation		665
	( being depreciation accounted)
30.06.19	Depreciation A/c                         Dr	1330
	To Machine A		380
	To Machine B		950
	( being depreciation charged)
30.06.19	Profit & loss account                  Dr	1330
	To Depreciation		1330
	( being depreciation accounted)
30.06.19	Loss on Revaluation                               Dr	230
	To Machine A		230
	( being loss acounted on revaluation)
30.06.19	Machine B                                       Dr	425
	To Gain on Revaluation		425
	( being gain accounted on revaluation)
02.01.20	Repairs on Machine B A/c                               Dr	6600
	To cash		6600
	( being repairs carried out)
31.03.20	Depreciation A/c Dr	95.31
	To Machine A		95.31
	( being depreciation charged)
31.03.20	Profit & Loss A/c    Dr	95.3125
	To depreciation		95.3125
	( being depreciation accounted)
31.03.20	Machine C A/c   Dr	6495
	To Machine A		2800
	To cash		3600
	To Installation and transportaion cost		95
	( being Machine C purchased)
31.03.20	Profit & Loss A/c    Dr	114.06
	To Loss on sale of Machine A		114.06
	( being loss accounted)
30.06.20	Depreciation A/c                         Dr	819.67
	To Machine C		177.97
	To Machine B		641.70
	( being depreciation charged)
30.06.20	Profit & loss account                  Dr	819.67
	To Depreciation		819.67
	( being depreciation accounted)
30.06.20	Loss on Revaluation               Dr	420.80
	To Machine B		420.80
	( being loss on revaluation)
30.06.20	Machine C                                   Dr	182.97
	To gain in revaluation		182.97
	( being gain on revaluation)

Machine	01.01.18	Salvage value	Years	Depreciation
A	4000	200	10	380
B	10000	500	10	950
Depreciation = (purchase value- salvage value)/ no of years
Machine	01.01.18	Depreciation 30.06.18	01.07.18	Depreciation (07.18-30.06.19)	30.06.19	Revaluation	Gain/ (Loss)
A	4000	190	3810	380	3430	3200	-230
B	10000	475	9525	950	8575	9000	425
Machine	01.07.19	Salvage value	Years	Depreciation till dec 19	01.01.20	02.01.20	Total value	useful life increases	Total useful life	residual value	Depreciation	dep 30.06.20
A	3200	150	8	190.63	3009.375		3009.38		7.5	0
B	9000	400	8	537.50	8462.5	6600	15062.5	3.5	11	945	1283.41	641.70	14420.80
Machine	02.01.20	Depn till 31 March 20	Net value	exchange of Machine C	Loss on exchange
A	3009.38	95.31	2914.06	2800	114.06
	31.03.20	salvage value	Years	depreciation
C	6495	800	8	711.88
Machine	31.03.20	depn till 30.06.20	01.07.20	Revaluation	Gain/ (Loss)
C	6495	177.97	6317.03	6500	182.97
B		641.70	14420.80	14000	-420.80