Question

Question B2 Part 1 Classify each of the following expenditures related to the purchase of a new computing system of Solar Company as capital expenditure or revenue expenditure: (a) Purchase price, net of sales discount, of the computing system (b) Sales tax paid in conjunction with the purchase of the computing system (c) Insurance expense for delivery of the computing system (d) Interest charges on a note payable issued by Solar Company for part of the purchase price of the computing system (2 marks) Part II On 5 October 2019, Lottie Sewing Company purchased a new sewing machine for $3,000,000. The machine has an estimated residual value of $300,000 with estimated useful life of 10 years, or 400,000 machine hours. The financial year-end date is 31 December and the company adjusts its accounts annually. Required: Calculate the depreciation expenses of this machine in 2019 and 2020 respectively by using the following methods: (a) 200%-declining-balance method (with deprecation calculated to the nearest whole month); (2 marks) (2 marks) (b) Units of output method (hours of operation 20,000 in 2019; 50,000 in 2020). Part III Marvel Company purchased motor vehicle costing $1,200,000 on 15 September 2017. The motor vehicle has an estimated useful life of 5 years and residual value of $200,000. Straight-line depreciation method is used. Half-year convention is adopted. On 5 March 2020, the company sold the motor vehicle for $400,000 cash. The company adjusts its accounts annually with the year-end at 31 December Required: (a) Prepare the journal entries to update the depreciation before disposal in 2020; (2 marks) (b) Prepare the journal entries on 5 March 2020 regarding to the disposal. (4 marks)

Answer 1

Part I

a) Capital Expenditure

b) Capital Expenditure

c) Capital Expenditure

d) Revenue Expenditure

Part II

Rate of depreciation = 100% / 10 = 10%

a) under 200% declining balance method rate = 10%*2 = 20%

2019

Depreciation = 3000000 * 20% *3/12 = $ 150000

2020

Depreciation = (3000000-150000) * 20% = $ 570000

b) Units of output method

2019

Depreciation = ((3000000 - 300000)/400000) *20000 = $ 135000

2020

Depreciation = ((3000000 - 300000)/400000) *50000 = $ 337500

Part III

Depreciation in 2017 =( (1200000 - 200000)/5)/2 = $ 100000

Depreciation in 2018 = (1200000 - 200000)/5 = $ 200000

Depreciation in 2019 = (1200000 - 200000)/5 = $ 200000

Depreciation in 2020 =( (1200000 - 200000)/5)/2 = $ 100000

a)    Debit Credit

Depreciation Expense 100000

To Accumulated Depreciation 100000

b) Cash 400000

Accumulated Depreciation 600000

Loss on Disposal of Motor

Vehicle 200000

To Motor vehicle 1200000

Part IV

Depreciation for 2018 = ((100000 - 10000)/4)*4/12 = $ 7500

Depreciation for 2019 = (100000-10000)/4 = $ 22500

Depreciation for 2020 (before overhauling) = ((100000 - 10000)/4)*2/12 = $ 3750

Depreciation for 2020 (After overhauling) = ((100000 + 25000 - 6000)/3)*10/12 = $ 33056

Total Depreciation for 2020 = $ 3750 + 33055.56 = $ 36805.56