Question

ABC has the following accounts in the Property, Plant and Equipment (PPE) section
of its balance sheet: Land, Buildings, and Equipment. Each non-current asset account
has a separate accumulated depreciation contra-account except for Land. ABC uses
the historical cost principle to value its fixed assess after acquisition. ABC completed
the following transactions in fiscal year 2017. ABC has a fiscal year end of 31st
December.
3rd January 2017: ABC exchanged old equipment with accumulated depreciation of
€130,000 (cost of acquisition = €272,000) for similar type of new equipment with a
selling price of €350,000. In addition to the exchange of the old equipment with the
new, ABC paid €200,000 in cash to the supplier of the new equipment. The fair
market value of the equipment given up by ABC cannot be estimated reliably.
1st July 2017: ABC sold the Building A. The Building A appeared with a cost of
€1,310,000 and accumulated depreciation of €260,000 in the balance sheet of ABC
for the prior fiscal year 2016. ABC uses the straight-line depreciation method for
estimating the depreciation expense of its buildings. The management of ABC
estimates a useful life of Building A equal to 40 years and a residual value equal to€310,000. ABC received from the purchaser of the building €230,000 cash and a
€710,500 note receivable.
31st October 2017: ABC made significant capital expenditures, acquiring land and a
new building for a total price of €780,000. Based on estimates of an independent
appraisal, the land had a fair value of €442,200 and the building of €361,800.
31st December 2017: ABC recognized depreciation for its fixed assets based on the
following information:
- The management of ABC expects a useful life for its newly purchased equipment
equal to 5 years and a residual value equal to 10% of its acquisition cost. ABC uses
the double-declining-balance method for estimating the depreciation on its equipment.
- The management of ABC expects a useful life for its newly purchased building
equal to 40 years and a residual value equal to 25% of its acquisition cost. ABC uses
the straight-line depreciation method for estimating the depreciation on its buildings.
During the fiscal year 2018, ABC has not purchased or sold any fixed assets (zero netcapital expenditures).
31st December 2018: ABC recognized depreciation for its fixed assets based on the
following information:
- The management of ABC used the same assumptions for the estimation of
depreciation on its equipment as in fiscal year 2017.- The management of ABC changed its assumptions for the estimation of depreciation
on its building compared to fiscal year 2017. The remaining useful life is estimated as
equal to 45 years and the residual value as equal to €50,000. The changes were
effective from the beginning of the fiscal year 2018. ABC continues to use the
straight-line depreciation method for estimating the depreciation on its buildings.
Required:
Based on the above data, please record the journal entries in ABC’s books for fiscal
years 2017 and 2018.

Answer 1

Books of ABC
Sr. Number	Journal Entry	Amount
1	Date 3rd Jan 2017 -
	New Equipment A/c Dr.	€ 350,000
	Accumulated Depreciation A/c Dr.	€ 130,000
	To Old equipment A/C	€ 272,000
	To Cash	€ 200,000
	To Profit on Exchange of Equipment	€ 8,000
	(Being sale/exchange of old equipment for new one )
2	Date 1st Jul 2017
	Depreciation on Building A A/C Dr.	€ 15,750
	To Accumulated Depreciation on Building A	€ 15,750
	(Being Depreciation for the year 2017 charged)
	Explanation -
	Cost of the Building	€                        1,310,000.00
	Accumulated Depreciation	€                            260,000.00
	Total Cost	€                        1,570,000.00
	Useful life of the Asses	40 years
	Residual Value	€                            310,000.00
	Depreciation under SLM -	(Cost - Residual Value) / Useful life of the Assets
		(1570000-310000) / 40
		31500 per year
	Depreciation for 6 Months	(31500*6)/12
		€                              15,750.00
3	Bank /Cash A/C Dr -	€                            230,000.00
	Notes Receivable A/C Dr.	€                            710,500.00
	Accumulated Depriciation A/C Dr. (€ 260,000 + € 15,750)	€                            275,750.00
	Loss on Sale of Building A Dr	€                              93,750.00
	To Building A	€                        1,310,000.00
	(Being Sale of Building A made)
4	31st Oct 2017
	Land & New Building A/C Dr	€                            780,000.00
	To Cash/Bank	€                            780,000.00
	(Being Purchase of New Land & Building)
5	31st Dec 2017
	Depreciation on Equipement A/c Dr	€                            140,000.00
	To Accumulated Depreciation on Equipement	€                            140,000.00
	(Being new equipement depreciated)
	Explanation on calculation of Dep on equipement
	Dep on New Equipement -
	Cost of New Equipment	€                            350,000.00
	Useful Life	5
	Note: Residual value under this method of Dep is not considered
	Depreciation under Double Declining Balance Method	(350000/5)*2
		€                            140,000.00
6	31st Dec 2017
	Depreciation on Building A/c Dr	€                                      1,097
	To Accumulated Depreciation on Building	€                                      1,097
	(Being New Buinding Depreciated)
	Depreciation on Building -	(780000/804000)*361800
		€                            351,000.00
	Cost of the Building
	Note: Individual Cost of the capital is calculated based on the ration of Fair market value the Land and Building	25% of Acqusition Cost i.e. 87750
		40 years
	Residual Value of Building
	Useful life	(351000-87750)/40
		6581.25 Per year
	Depreciation under SLM	(6581.25*2)/12
		€                                1,097.00
	Depreciation for 2 Months (Since the Building was purchased on 31st Oct)
1	31st Dec 2018
	Depreciation on Equipment A/C Debit	€                              84,000.00
	To Accumulated Depreciation	€                              84,000.00
	(Being equipment Depreciated)
	Calculation -
	Last Year's depreciable value of the Equipment	350000-140000
		€                            210,000.00
	Depreciation on second Year =	(210000/5)*2
		€                              84,000.00
2	31st Dec 2018
	Depreciation on Building A/C Dr	€                                6,665.00
	To Accumulated Depreciation on Building	€                                6,665.00
	Calculation -
	Depriciable cost of Building in 2018	351000-1097
		€                            349,903.00
	Remaining life of the asset	45 years
	Residual Value	€                              50,000.00
	Depreciation	Cost - Residual value / Usuful life
		(349903-50000)/45
		€                                6,665.00