Lecture Notes Solutions Lecture 7, Topic 7

Chapter 8
Reporting and analysing non-current assets
The cost of an asset
Example: Calculation of the cost of land
A property is acquired at a cash cost of $100,000. It contains an old warehouse that is
demolished at a net cost of $6,000 ($7,500 in costs less $1,500 proceeds from salvaged
materials). Solicitors fee of $1,000 and stamp duty of $2,000 are paid.
Land
Cash price of property
Net removal cost of warehouse
Solicitors fee
Stamp duty
Cost of land

$100,000
6,000
1,000
2,000
$109,000

Example: Calculation of the cost of delivery truck

A delivery truck is purchased for $22,000. Related expenditures are for air-conditioning
$1,320, painting and lettering $500, motor vehicle registration $350, and a 3 year accident
insurance policy $1,600.
Delivery Truck
Cash price
$22,000
Air-conditioning
1,320
Painting and lettering
500
Cost of delivery truck
$23,820
Journal entry to record purchase of the truck and related expenditures:
Delivery Truck
Motor Vehicle Registration Expense
Prepaid Insurance
Cash at Bank
Purchase of delivery truck and related expenditures

23,820
350
1,600
25,770

Depreciation methods
1. Straight-line method
Straight-line depreciation schedule:
Calculation
End of Year
Depreciable Depreciation
Depreciation Accumulated Carrying
amount
x rate
= expense p.a. depreciation
amount
2010
$12,000
20%
$2,400
$2,400
$10,600
2011
$12,000
20%
$2,400
$4,800
$8,200
2012
$12,000
20%
$2,400
$7,200
$5,800
2013
$12,000
20%
$2,400
$9,600
$3,400
2014
$12,000
20%
$2,400
$12,000
$1,000
Total $12,000
* Cost $13,000 Year 1 depreciation $2,400 = Carrying amount $10,600
Year

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Journal entry to record depreciation expense:

Dec 30

Depreciation Expense - Delivery Truck

Accumulated Depreciation Delivery Truck
To record depreciation expense for the year

2,400
2,400

2. Diminishing-balance method
Diminishing-balance depreciation schedule:
Year
2010
2011
2012
2013
2014

Calculation
End of Year
Depreciable Depreciation
Depreciation Accumulated Carrying
amount
x rate
= expense p.a. depreciation
amount
$13,000
40%
$5,200
$5,200
$7,800
$7,800
40%
$3,120
$8,320
$4,680
$4,680
40%
$1,872
$10,192
$2,808
$2,808
40%
$1,123
$11,315
$1,685
$1,685
40%
$685**
$12,000
$1,000
Total $12,000

* $13,000 - $5,200
** Calculation of $674 ($1,685 x 40%) is adjusted to $685 in order for carrying amount to
equal residual value. This is because the rate was rounded to 40%, rather than 40.13%.
3. Units-of-production method
Units-of-production depreciation schedule:
Year
2010
2011
2012
2013
2014

Calculation
Units of
Depreciation
Production (km) Cost/unit
15,000
$0.12
30,000
$0.12
20,000
$0.12
25,000
$0.12
10,000
$0.12
Total 100,000

End of Year
Depreciation
Accumulated Carrying
= expense p.a.
Depreciation amount
$1,800
$1,800
$11,200 *
$3,600
$5,400
$7,600
$2,400
$7,800
$5,200
$3,000
$10,800
$2,200
$1,200
$12,000
$1,000
Total $12,000

* $13,000 - $1,800
Sale of PPE assets
Example - Gain on sale
- Wright Ltd sells office furniture on 1 July 2010 for $16,000 cash
- original cost was $60,000
- accumulated depreciation to 1 January 2010 is $41,000
- depreciation expense for first 6 months of 2010 is $8,000
Journal entry to record depreciation:
July 1

Depreciation Expense Office Furniture

Accumulated Depreciation Office Furniture
To record depreciation expense for first 6 mths of 2010

Financial Accounting
Lecture Illustration Solutions Topic 7
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8,000
8,000

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Journal entry to record the gain on sale of the asset:

July 1

Cash at Bank
Accumulated Depreciation Office Furniture
Office Furniture
Gain on Disposal
To record sale of office furniture at a gain

16,000
49,000
60,000
5,000

Example - Loss on sale

- Assume that office furniture was sold for $9,000 rather than $16,000.
Journal entry to record the loss on sale of the asset:
July 1

Cash at Bank
Accumulated Depreciation Office Furniture
Loss on Disposal
Office Furniture
To record sale of office furniture at a loss

9,000
49,000
2,000
60,000

Amortisation
Example Amortisation of patents
Patent costs $60,000 and has an estimated useful life of 8 years.
Annual amortisation expense: $60,000 8 = $7,500
Journal entry to record annual amortisation:
Dec 31

Amortisation Expense
Accumulated Amortisation - Patents
To record patent amortisation

7,500
7,500

Chapter 9
Reporting and analysing liabilities
CURRENT LIABILITIES
Notes Payable
Example Notes payable
West State Bank agrees to lend $100,000 on 1 March 2010 in exchange for a $100,000
12% 4 month note.
Journal entry when note issued:
Mar 1

Cash at Bank
Notes Payable
To record issue of 12%, 4-month note to West State Bank

100,000
100,000

Journal entry to record interest:

June 30

Interest Expense
Interest Payable
To accrue interest for 4 months on West State Bank note

Financial Accounting
Lecture Illustration Solutions Topic 7
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4,000
4,000

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Journal entry to settle liabilities:

Jul 1

Notes Payable
Interest Payable
Cash at Bank
To record payment of West State Bank interest-bearing
note and accrued interest at maturity

100,000
4,000
104,000

Payroll and payroll deductions payable

Example Payroll deductions
Entity withholds tax of $32,036 from its employees wages and salaries of $100,000.
Journal entry for payroll accrual and payment:
Mar 7

Salaries and Wages Expense

PAYG Withheld Tax Payable
Salaries and Wages Payable
Payroll and withheld taxes for week ending 7 March
Salaries and Wages Payable
Cash at Bank
To record payment of the 7 March payroll

100,000
32,036
67,964
67,964
67,964

Journal entry when payments are made:

Apr 6

PAYG Withheld Tax Payable

Cash at Bank
Payment of withheld taxes for March

32,036
32,036

Revenues received in advance

Example revenue received in advance
Stadium Tasmania Ltd sells 10,000 season football tickets at $50 each for its 5 game
home schedule.
Journal entry to record revenue received in advance:
Aug 6

Cash at Bank
Ticket Revenue Received in Advance
To record sale of 10,000 season tickets

500,000
500,000

Journal entry when service is delivered:

Sep 5

Ticket Revenue Received in Advance

Ticket Revenue
To record football ticket revenue

Financial Accounting
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100,000
100,000

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NON-CURRENT LIABILITIES
Accounting for loans payable by instalment
Example Loans payable by instalment
CAS Ltd has a mortgage on which interest is payable at 12% per annum, with monthly
payments of $10,000. At the beginning of March 2012, the balance of the Loan Payable
account was $100,000.
Interest expense = $100,000 x 12% = $12,000 p.a. x 1/12 = $1,000 per month
The payment of $10,000 in March includes $1,000 interest expense and $9,000 reduction
in the loan principal.
Journal entry to record mortgage payment:
March 31

Interest Expense
Loan Payable
Cash at Bank
To record the loan payment for March

1,000
9,000
10,000

Recording provisions for warranties

Example - Warranties
Electrobuz sells electronic equipment with a 12 month warranty and has a balance date of
30 June. Electrobuz estimates that the cost of servicing unexpired warranties will be
$200,000.
Journal entry to record liability for outstanding warranties:
June 30

Warranty Expense
Warranty Provision
To record the liability for outstanding warranty
contracts

200,000
200,000

Journal entry to record goods replaced under warranty:

July 12

Warranty Provision
Inventory
To record replacement of goods under warranty

1,000
1,000

Assume that at balance date the following year after warranty claims have been made
during the year, the Warranty Provision account has a credit balance of $5,000. Electrobuz
estimates that the cost of servicing unexpired warranty contracts will be $210,000.
Journal entry to increase cost of servicing unexpired warranty contracts:
June 30

Warranty Expense
Warranty Provision
To adjust the Warranty Provision account to total
estimated liability for contracts outstanding at
balance date ($210,000 - $5,000)

Financial Accounting
Lecture Illustration Solutions Topic 7
Reprinted with permission of John Wiley & Sons, Inc.

205,000
205,000

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