Question

Part I 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) (b) Units of output method (hours of operation 20,000 in 2019; 50,000 in 2020). (2 marks) 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
	The two types of expenditure are:
1	Capital expenditure: Capital expenditure is the expenses incurred by the entity towards purchase of the fixed assets. It also includes those expenses incurred towards the asset that increases the shelf life of the asset. These are high value expenditure and the expenditure is towards benfit of asset for a long term period.
2	Revenue expenditure: Revenue expenditure is the expenses incurred by the entity towards revenue transactions incurred during day to day opearting cycle of the entity such as repairs and maintenance expenses.
	As per the question, on purchase of a new computing system of a solar company, the following expenditure can be classified into capital or revenue as defined above
a)	Purchase price, net of sales discount : Capital expenditure as this is the capital amount invested in the asset.
b)	Sales tax paid in conjunction with the purchase of the computing system: Capital expenditure as Sales tax is generally added to the cost of the asset, so it will be capitalised along with the purchase price of the asset
c)	Insurance expense for delivery: Capital expenditure as delivery cost is added to the cost of the asset at the time of purchase of asset. Thus, any additional cost on delivery (insuarnce on delivery in the question)is a part of delivery cost which will be added to the cost of the asset and will be capitalised.
d)	Interest charges on note payable issued by solar company for part of purchase price of the computing system: Note payable is a liability and interest charges on the same will be considered as revenue expenditure.
	Part II
	As per the question, details of the sewing machine as on October 5, 2019 are as under:
	Purchase price of the new sewing machine = $ 3000,000
	Residual value = $ 300,000
	Useful life = 10 years or 400,000 machine hours
	a) 200% declining balance method :
	In 200% declining balance method, we do not deduct the salvage value of the asset from the cost and the formula for calculating depreciation is:
	Double Declining rate of depreciation = 2 X Straight line rate of depreciation
	2 X (100%)/ 10 (Useful life)
	20%
	Depreciation as on 31st December, 2019 (depreciation for 3 months)= Book value X Double Declining rate of depreciation = 3000,000 X 20% X 3/12 = $150,000
	Depreciation as on 31st December, 2020 = Remaining book value X Double Declining rate of depreciation = (3000,000 - 150,000) X 20% =$570,000
	b) Units of output method
	Formula for the same is = (Orignal cost- Salvage value)/Expected number of units to produce in its useful life * No. of units produced in that year
	Depreciation as on 31st December, 2019 (20,000 hours of operation)= {(3000,000 - 300,000)/400,000}* 20,000 = $135,000
	Depreciation as on 31st December, 2020 (50,000 hours of operation)= {(3000,000 - 300,000)/400,000}* 50,000 = $ 337,500