Question

You are working as the accountant for the company Jailbreak Pty Ltd. Jailbreak Pty Ltd produces bolt cutters, a tool used for cutting chains, padlocks, bolts and wire mesh. When starting up in 2012, the following transactions took place in relation to the start- up of the operations:

• 1 September 2012, Jailbreak Pty Ltd bought the machinery for $575,000 cash. In order to get the machinery ready to be used, Jailbreak Pty Ltd spent an additional $75,000 cash to have the machinery installed on 1 October 2012. The machinery has an expected useful life of 10 years and an expected residual value of $50,000 and the machinery is depreciated on a straight-line basis.

Jailbreak Pty Ltd’s the chief accountant and your superior, Angus Young, decided to account for the machinery using the cost method.

As at 30 June 2013, there was an indication that the machinery might be impaired. In preparing for the impairment testing, you have estimated, as at 30 June 2013, the machinery’s fair value less cost sell to be $456,000 and its value in use to be $435,000. As at 30 June 2013, the useful life of the machinery was revised to be only seven years; there was no change in the original assessment of the residual value or the depreciation method.

As at 30 June 2015, Jailbreak Pty Ltd. shut down its operations and sold its machinery for $200,000 and received cash in full.

Required:
(a) With respect to the machinery, write the journal entries for the following

transactions or events (if any). Assume no tax. 1st September 2012:

  

1st October 2012:

DO NOT WRITE OUTSIDE THE BOX

DO NOT WRITE OUTSIDE THE BOX

  

30th June 2013:

  

30th June 2014:

30th June 2015:

DO NOT WRITE OUTSIDE THE BOX

DO NOT WRITE OUTSIDE THE BOX

    

DO NOT WRITE OUTSIDE THE BOX

Answer 1

01-09-2012	Purchase of Mechinery
	DR	Mechinery A/C	575000
	CR	Cash A/C	575000
01-10-2012	Installation costs are also added to cost of machinery
	DR	Mechinery A/C	75000
	CR	Cash A/C	75000
30-06-2013	Impairment
	DR	Loss on Impairment A/C	149000
	CR	Machinary A/C	149000
30-06-2015	Sale of Asset
	DR	Cash A/C	200000
	DR	Loss on Sale of Asset A/C	169000
	CR	Machinery	369000
	Working -1
	Value of Machine as of 30-06-2013
	Cost	650000
	Residual Value	50000
	Depreciable Amount	600000
	Life time	10 years
	Deprecialtion for 2012 -3 months -OCT to DEC	15000
	Deprecialtion for 2013 -6 months -JAN to JUNE	30000
A	Value of Machinery as on 30-06-2013	605000
B	Fair value less cost of Sale	456000	}	Higher of Two	456000
C	Value in Use	435000
	The Value for Impairment shall be lower of Book value or the resultant value from above
	i.e 456000 shall be revised book value
	Hence the diffence between 605000 and456000 shall taken to loss on impairment account
	Working -2
A	Book value as on 30-6-2013	456000
B	Residual value	50000
C	Life time	7 years
D	Deprciation from 1-7-2013 to 30-6-2015 (1.5 years)	87000
E = A-D	Book value as on 30-06-2015	369000
F	Sale Value	200000
G = E-F	Loss on sale of Asset	169000