Question

H. A. D. 1 Exercises 2 Exercise C 3. 4 Fine Company purchased a heavy machine to be used in its factory for $ 720,000, less a 2 per cent cash discount. The company paid a fine of $ 3,600 because an employee hauled the machine over city streets without securing the required permits. The machine was installed at a cost of $ 21,600, and testing costs of $7,200 were incurred to place the machine in operation. Prepare a schedule showing 5 the recorded cost of the machine. 6. 8.

Answer 1

EXERCISE C

Fixed Asset Register

Name of the Asset	Heavy Machine
	(Amounts in $)
Description	Amount
Purchase Cost	720,000
Fine for Permits	3,600
Installation Cost	21,600
Testing Cost	7,200
Total Recorded Cost	752,400

Trade Discounts can be reduced from the Purchase Cost However, Cash Discount of 2% is not to be reduced from Purchase cost. Cash Discounts is like a reverse Interest Expense. it’s an income received because of our own internal policy of taking advantage of early settlement discounts. It’s not, therefore, a reduction in the accounting cost of the Machinery.

EXERCISE D

No of Shares issued - 50 Shares. The stock recently traded at $ 400 per share. Hence the Fair value of  Shares issued is $ 20,000

The Fair Value of Machine 3 Years ago of $ 30,000 is not a indication of the fair value of the Machine as on date.

If the Machinery cannot be measured at fair value, the cost is measured at the fair value of the Shares issued. Hence the Machinery should be recorded at fair value of the Shares issued i.e. $ 20,000.

EXERCISE E

	JOURNAL
		POST		Amount in $
Date	Account / Description	REF.	Debit	Credit
01 March 2009	Office Furniture	1	29,760
01 March 2009	Cash	1		29,760
	(Being Office Furniture Purchased)
01 March 2009	Office Furniture	2	480
01 March 2009	Cash	2		480
	(Being Freight Cost incurred on Office Furniture)
31 December 2009	Depreciation	3	6,000
31 December 2009	Office Furniture	3		6,000
	(Being Depreciation for 10 months from 1st March 2009 to 31st December 2009 ((29760+480-1440)/4)*10/12)
01 July 2010	Repairs and Maintenance	4	192
01 July 2010	Cash	4		192
	(Being incurred for refinish of Furniture)
31 December 2010	Depreciation	5	7,200
31 December 2010	Office Furniture	5		7,200
	(Being Depreciation from 1st January 2010 to 31st December 2010 (29760+480-1440)/4)

EXERCISE F

Note : Since Asset acquired on January 2, full year depreciation is calculated. Depreciation can be calculated for 364 days. For ease of understanding Depreciation is calculated for Full Year

		Amounts in $
1	Depreciation under Straight Line Method
	Cost	4,00,000
	Salvage Value	40,000
	Useful Life	6 Years
	Depreciation 2018	60,000.00
	(400000-40000)/6
	Depreciation in 2019	60,000.00
	(400000-40000)/6
2	Units of Production method
	Cost	4,00,000
	Salvage Value	40,000
	Units of Production through useful life	7,20,000
	Units produced in 2018	30,000
	Units produced in 2019	60,000
	Depreciation 2018	15,000.00
	(400000-40000)/720000*30000
	Depreciation in 2019	30,000.00
	(400000-40000)/720000*60000
3	Double Declining Balance
	Cost	4,00,000
	Salvage Value	40,000
	Useful Life	6 Years
	Straight Line Depreciation 2018	60,000.00
	(400000-40000)/6
	Double Declining Balance @ 2 * Straight Line Depreciation	1,20,000.00
	(2 * 60000)
	Straight Line Depreciation in 2019	60,000.00
	(400000-40000)/6
	Double Declining Balance @ 2 * Straight Line Depreciation	1,20,000.00
	(2 * 60000)