Problem # 1
ABC Trading operates in a very competitive field. To maintain its market position, it purchased two new machines for cash on 1 January 2012. 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 2013, ABC 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 1st January 2014, extensive repairs were carried out on Machine B for $66,000 cash. ABC 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 $9,450.
Owing to technological advances, ABC Trading decided to replace Machine A. It traded in Machine A on 31st March 2014 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 cost 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 $8,000.
ABC Trading uses the straight-line depreciation method and recording depreciation to the nearest dollar. The end of its reporting period is 30 June.
On 30 June, 2014 fair values were determined to be $140 000 and $65 000 for Machine 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 June 2014 (Narrations are not required but show all workings)
Problem # 2
a) ABC Ltd has incurred expenditure, the treatment of which is not prescribed by any existing accounting standard. The board of directors has requested the financial accountant to record the expenditure as an asset so as not to impact the current year's profit. The accountant is concerned with the request and requires your assistance in determining an accounting policy for this expenditure.
Required:
Provide the accountant with two accounting policies or treatments that the company could adopt to account for this expenditure. Also what assistance does AASB provide to help the accountant choose between the policies provided in the abovecase.
b) Black Boats builds ocean-going yachts which generally take up to 3 years to construct and are worth $50 million each. The company normally takes out a loan to finance the initial construction phase for each yacht. Interest on these loans has been treated as an expense with $750 000 written off over the last 5 years. In the current year ended 30 June 2012, the company changed its accounting policy with respect to interest and now capitalises the interest against the cost of each yacht as allowed by AASB 123 Borrowing Costs. Amounts of $40,000 and $22,000 were capitalised against two yachts on which construction started this year but no adjustments have been made for yachts under construction at the beginning of the year. The new accounting policy and its impact have been disclosed in the notes to the financial statements for the year ended 30 June 2012.
Required:
Critically evaluate the company's adoption of the new accounting policy with respect to the requirements of AASB 108.