Question

JoJo Limited ("JoJo") purchased a machinery for its plant on 1 May 2017. The machinery is expected to have a 10-year life and no residual value. The following expenditures were associated with the purchase: Cost of the machinery Freight-in charges Commission fees Legal title fees Sales taxes Essential set-up charges Cost to repair machinery damaged during installation 100,000 3,750 6,000 9,250 5,500 1,500 800 JoJo adopts the cost model as its accounting policy in subsequently measuring its property, plant and equipment. Required: (a) Determine the cost of the machinery with detailed workings of calculations. (5 marks) (b) Calculate depreciation expense for the years 2017 to 2019 under 200 percent declining- balance method, using the half-year convention. Use the below-mentioned table for the calculation from 2017 to 2019: Year Computation | Book value Depreciation Expense Accumulated Depreciation (3 marks) (c) Which depreciation method (Straight-line, Double-declining balance or Units of production) JoJo should use if JoJo wants to achieve the following separate objective? (i) Report the highest possible earnings in its financial statements in the first two years. (1 mark) (ii) Minimize its taxable income reported to the tax authority in the first three years. (1 mark) (iii) Report the lowest reported book value of the machinery at the end of 2017. (1 mark) (d) Assume that JoJo sold the old machinery that was being replaced. The old machinery had originally cost of $30,000. Its book value at the time of the sale was $4,000. Prepare journal entries to record the sale of the old machinery if it was sold for $3,000 on account. (4 marks)

Answer 1

Required a

Cost of machinery would include all cost incurred to put the asset to intended use.

$ Cost of the machinery Freight-in charges Commission fees Legal title fees Sales taxes Essential set-up charges Cost to repair machinery damaged during installation Total Cost to be capitalized 100.000 3.750 6.000 9.250 5,500 1,500 800 126,800

Required b

Life = 10 years

Rate for 200% declining balance depreciation = (1/life * 200%) = 20%

Year	Computation	Depreciation Expense	Accumulated Depreciation	Book Value
2017	(126800*20%*1/2)	$       12,680	$           12,680	$               114,120
2018	(114120*20%)	$       22,824	$           35,504	$                 91,296
2019	(91296*20%)	$       18,259	$           53,763	$                 73,037

Required c.

i) Straightline method

ii) Units of Production method

iii) Double Declining Balance method

Required d

Accounts receivable	$         3,000
Accumulated Depreciation -Machinery	$       26,000
Loss on sale of machinery	$         1,000
Machinery		$           30,000

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