Question

Rupert Cooper operates a flying school out of Moorabbin Airport that provides flight training lessons to student pilots in Victoria. The following transactions relate to a Cessna airplane that was purchased by the business on 1 July 2014. The business is registered for GST and the GST rate is 10%.

1 July 2014

On 1 July 2014, a new Cessna airplane was purchased for $180,000 (plus GST). The Cessna airplane is depreciated using the straight-line depreciation method and the Cessna airplane has an estimated useful life of 12 years with a residual value of $30,000.

1 July 2019

On 1 July 2019, due to the government increasing the import duty on airplanes, the value of Cessna airplanes has increased. At the same time, Rupert Cooper decided to change accounting for the Cessna airplane from the cost model to the revaluation model. Consequently, the estimated fair value of the Cessna airplane is now $17,500 higher than its current carrying amount as at 1 July 2019. The depreciation method and the expected useful life of the Cessna airplane have not changed. However, it was decided that the residual value of the Cessna airplane at the end of its useful life will be $44,000.

REQUIRED:

(e) Prepare the necessary journal entries to revalue the Cessna airplane as at 1 July 2019.

(f) Prepare the journal entry to record the depreciation of the Cessna airplane for the year

      ended 30 June 2020.

Answer 1

JOURNAL ENTRIES IN THE BOOKS OF RUPERT COOPER

e)Journal entry to revalue Cessna Plane as at 1ST July 2019

$ $

Cessna Plane 17500

To Revaluation Surplus 17500

(revaluation profit is not considered as normal profit)

f)Journal entry to record depreciation on 31/june/2020

$ $

Depreciation 13000

To Cessna Plane 13000

(The plane has a useful life of 12 years and uses straight-line depreciation. Yearly depreciation is hence $(180000-30000)/12 or $12,500. Accumulated depreciation as at 30/june /2019 is $12500*5 or $62500 and the carrying amount is $180000 minus $62500 which equals $117500,

Book Value as on 1/july/2019 is $117500+17500=$135000

Therefore, Depreciation for remeaning usefull life is calculated

ie,(135000-44000)/7=$13000))

NOTE:Considered $180000 including GST)