Question

Sierra Nevada Water Corporation paid $270,000 to purchase equipment for use in its manufacturing operations. In addition, Sierra Nevada Water Corporation incurred the following expenditures relating to the equipment:

∙ $1,500 freight to have the equipment shipped to its manufacturing facility

∙ $750 insurance while the equipment was in transit

∙ $3,200 for special steel and concrete reinforcements used to house the equipment in the factory

∙ $1,200 for a one-year insurance policy on the equipment after it has been installed

∙ $300 to test the equipment before it is placed in service

∙ $400 for maintenance costs during the first year of service

Required:

Calculate the cost of the equipment that would be capitalize on the balance sheet.

Small Valley Ltd. purchased machinery on January 2, 2015, at a total cost of $85,000. The machinery's estimated useful life is 8 years or 60,000 hours, and its residual value is $5,000. The tax rate for CCA is 30%. During 2015 and 2016, the machinery was used 7,000 and 7,500 hours, respectively.

Required:

1. Compute depreciation under straight-line, units-of-production, and declining-balance methods for 2015 and 2016.

2. If management’s objective in 2015 is to maximize income which method would you prefer? If it was income smoothing which method would you prefer?

3. It was decided in 2015 that Small Valley would use the straight-line method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016.

4. It was decided in 2015 that Small Valley would use the deminishing balance method of depreciation. In December 30, 2016 Small Valley sold the equipment for $55,000 cash. Prepare ALL journal entries relating to the equipment and disposal in 2016.

5. Looking at your answers in part c) and d) explain why there was a difference in the gain or loss recorded from the sale of the equipment.

Answer 1

As per IAS 16, only those expenses which are incurred to bring the asset to working condition of its intended use should be capitalised. So, only purchase price, freight, Insurance in transit, Special steel and concrete, testing should be capitalised.

The total cost comes to $ 2,75,750
Purchase prtce of equf pment4/10,000 Fietght da dJn 41.500 Tmsurance 9 750 Spectal steel and concrete$3,200 One year 1nSunante po(tay on eqpment $1,200 Testtng 300 तर Matntainen ce costs duing frst year of sertce 40o AS per TAS 16, all costs tncum ed /necessary to brtng asset to usorking andttron for 11s nten ded use are to be capitalsed to be capitaitsed Computatron of amount Parttaulars Amount Purch ase prtce 2,70/000 L500 (2) fretght 4 (3) Dnsuran (e n transtt (Stnce , ft 1s necessSary to get properly insured to be on toads t should be caPPtairsed) 3,200 (4) Spectal Steel and concrete Cspnce,1t 19 used to house equipment to bring s asset to workng conditton t shou)d be capitaltsed) (5) one Year tn Surance polfay atter instal)atfon stnie t1s not tncured to bring asset to ts orkfng condftfon tsh and th intended doesnot have enduing benefrt t shouldnot be capitoltsed) 4 300 6) es tng sin ce t B incured to bng asset to its worksng condrtton of fntended use, 9 Should be capitolts ed) 7) Mcintainence for fist year of Service

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