Question

1. Lululemon purchased a new plant for their shoes production division on July 1, 2019. Lululemon paid $5,000,000 for the production plant. It is a package purchase, which includes land, building and equipment. Currently, the land can be sold at $2,000,000, the building at 2,500,000 and the equipment at $1,000,000 in the market. The equipment has an estimated salvage of $20,000 and an expected useful life of 8 years or 500,000 units. (30 marks) (Long Term Assets) Required: a. Prepare the journal entry for the purchase of each individual assets on July 1, 2019 b. Given the equipment produced 20,000 units in 2019, prepare the journal entry for the depreciation if is the carrying value of the new equipment under each of the following methods for the equipment: i. straight-line units-of-production iii. double-declining balance 3

Answer 1

Answer:

(a)

JOURNAL ENTRY

Date	Account Details and Explanation	Debit ($)	Credit ($)
2019 July 1	Land	2,000,000
	Building	2,500,000
	Equipment	1,000,000
	Discount received		500,000
	Cash		5,000,000
	To record package purchase of a new plant which involves land, building and equipment and discount received

(b)

COMPUTATION OF DEPRECIATION

(i) Straight line method:

Cost price of equipment = $1,000,000

Estimated useful life = 8years

Salvage value = $20,000

Depreciation of each year = $(1,000,000-20,000)/8

= $122,500

OR

Depreciable value = $(1,000,000 - 20,000)

= $980,000

Rate of depreciation =1/8*100

= 12.5%

Depreciation = 12.5% of $980,000

= $122,500

Journal entry:

Date	Account Details and Explanation	Debit ($)	Credit ($)
	Depreciation expense	122,500
	Accumulated depreciation		122,500
	To record depreciation for year 2019

(ii) units of production method:

Depreciation for year 2019

= (Cost - salvage value)/Total Estimated units produce* units produce in year 2019

= $(1,000,000-20,000)/500,000*20,000

= $39,200

Date	Account Details and Explanation	Debit ($)	Credit ($)
	Depreciation expense	39,200
	Accumulated depreciation		39,200
	To record depreciation for year 2019

(iii) Double declining balance method:

Rate of depreciation = 2 times of rate of depreciation under straight line method

Rate of depreciation = 2*12.5%

= 25%

Depreciation for year 2019 = 1,000,000*25%

= $250,000

Date	Account Details and Explanation	Debit ($)	Credit ($)
	Depreciation expense	250,000
	Accumulated depreciation		250,000
	To record depreciation for year 2019