Straight Line Method
To determine the depreciation for the first year following information would be needed:
Depreciation meaning: depreciation means reduction in value of fixed asset in systematic manner till the time asset value becomes nil. Fixed asset examples are: furniture, machinery and office equipment. Therefore, the one calculating depreciation should know the exact meaning of it.
These are several methods of calculating depreciation. These are:
Straight line method of depreciation is the simplest and the most commonly used method. Formulae
Depreciation expense= asset cost- residual value/useful life of the asset
Unit of production method: this method is very useful in manufacturing businesses. Depreciation is calculated on the basis of capacity rather than number of years.
Calculation of depreciation is done in two steps:
Step 1: per unit depreciation: actual cost-residual value/total unit of production in useful life
Step 2: calculating depreciation expense:
Depreciation expense= per unit depreciation * units produced.
Formulae: Depreciation = 2 * Straight Line Depreciation percent * book value at the beginning of the accounting period
Book value = Cost of the asset – accumulated depreciation
The person calculating the depreciation should have full knowledge of these methods and the person calculating depreciation should know what method to be used. (Anon., n.d.)
The accountant must be aware when asset placed in service. At times it is similar to date of acquisition and at times later then the date of acquisition. So or the purpose of calculating depreciation knowing date asset placed in service is important.
Acquisition value: person calculating the depreciation must be aware of the acquisition cost of the asset and must add up the amounts which are to be capitalizing in value of the asset.
Salvage value: the accountant must be aware the asset’s value at the end of its life.
Useful life of the asset: every asset has a life span. Some have long and some have short. At times it is know and at times one has to make estimates(Anon., n.d.).
During the reporting period ending 30 June 2018, Midnight Boil Ltd constructed a nuclear power generator just outside of Melbourne. The cost of the power generator and associated technology amounted to $12 550 000.
Other costs associated with the construction amounted to:
|
Costs incurred in obtaining access to the site |
$2 500 |
|
Power Permits |
400 500 |
|
Engineers’ Fees |
1 100 500 |
|
4 001 500 |
The plant was ready to start generating power on 1 July 2018, with actual generation starting on 1 October 2018. At the end of the power plant’s useful life, which is expected to be 10 years, Midnight Boil Ltd is required by the government to dismantle the plant, remove it, and return the site to its original condition. After consulting its own engineers and environmentalists, Midnight Boil Ltd estimates these costs to be:
Unit of Production Method
|
Dismantling the plant |
$750 500 |
|
Environmental remediation costs |
1 249 500 |
|
Replacement of flora and fauna |
100 000 |
|
2 100 000 |
Midnight Boil Ltd uses a discount rate of 10 per cent.
Prepare the journal entries necessary to account for the power plant for the years ended 30 June 2018, 30 June 2019 and 30 June 2024. Ignore depreciation.
Entry for this on: 30th June 2018
Power generator 17361140
To accounts payable 12550000
To transportation expense payable 2500500
To utility expense payable 1100500
To engineers fees payable 4001500
To asset retirement obligation 809640
Asset retirement obligation: the amount has been calculated by calculating the present value using discount rate 10% for 10 years and added to the assets total value. Therefore, whatever cost are incurred by the company to bring asset to its location and condition needed to operate. All these costs are to be capitalized. All the three costs mentioned above are to be capitalized.
Now in the question they have asked to ignore depreciation.
On 30th June 2019 we will record increase in decommissioning liability/asset retirement obligation because we are 1 year closer to actual expenditure.
Finance cost (809640*10%) 80964
Asset retirement obligation 80964
The balance of decommissioning liability/asset retirement obligation will be 809640+809640=971568
On 30th June 2024:
The balance of decommissioning cost on 2023 will be (Jan, n.d.) (Jan, n.d.) 809640*(1.10) (1.10) (1.10) (1.10) (1.10) =1303933.31
Finance cost (1303933.31*10%) 13039
Asset retirement obligation 130393.3
Balance on 2024 will be 1434326.
Sun City Limited commences construction of a multi-purpose water park on 1 July 2014 for Pretoria Limited. Sun City Limited signs a fixed-price contract for total revenues of $50 million. The project is expected to be completed by the end of 2017 and Pretoria Limited controls the asset throughout the period of construction. The expected cost as at the commencement of construction is $38 million. The estimated costs of a construction project might change throughout the project—in this example, they do change. The following data relates to the project (the financial years end on 30 June):
|
2015 ($m) |
2016 ($m) |
2017($m) |
|
|
Costs for the year |
10 |
18 |
12 |
|
Costs incurred to date |
10 |
28 |
40 |
|
Estimated costs to complete |
28 |
12 |
– |
|
Progress billings during the year |
12 |
20 |
18 |
|
Cash collected during the year |
11 |
19 |
20 |
To calculate gross profit 1st we will calculate percentage completed:
Gross profit= contract price –estimated total cost (cost to date + estimated costs to complete)
2015= 50-10-28=12
2016=50-28-12=10
2017=50-40=10
Percentage of completion = cost to date/estimated total cost
2015 10/38*100=26.32%
2016 28/40*100=70%
2017 40/40*100=100%
Gross profit:
2015 12000000*26.32% 3158400
2016 1000000*70% 7000000-3158400=3841600
2017 1000000*100%=1000000-7000000=3000000
Journal entry using % completion method:
2015
Construction in progress 10000000
Materials, cash, payables, accumulated depreciation 10000000
(Assuming these as the costs)
Construction in progress 3158400
Construction expenses 10000000
Revenue from contract 13158400
Mam Ltd acquired Bo Ltd on 1 July 2018 for cash of $7 000 000. At that date, Bo Ltd’s net identifiable assets had a fair value of $5 800 000. The fair value of the net identifiable assets of Bo Ltd is determined as follows: (in $000)
|
Customer List |
50 |
|
Machinery |
1450 |
|
Buildings |
1500 |
|
Land |
3000 |
|
6000 |
|
|
Less: Bank Loan |
200 |
|
Net assets |
5800 |
At the end of the reporting period of 30 June 2019, the management of Mam Ltd determines that the recoverable amount of the cash-generating unit, which is considered to be Bo Ltd, totals $6 200 000. The carrying amount of the net identifiable assets of Bo Ltd, which excludes goodwill, has not changed since acquisition and is $5 800 000
In the given case Mam ltd. Took over Bo ltd. For 7000000 against the net asset of 5800000. Therefore, the goodwill will1200000.
on 30th June 2019 recoverable amount is 6200000. Impairment loss will set off with the goodwill.
Goodwill impairment 800000
Goodwill 800000
Recoverable amount is 4800000
Then first goodwill amount will set off and then for remaining amount impairment loss will be recognize:
Impairment loss 1000000
Goodwill impairment 1200000
Goodwill 1200000
Accumulated impairment loss 1000000
Anon., n.d. 5 Factors required for accurate depreciation. [Online] Available at: https://www.realassetmgt.com/95-factors-required-for-accurate-depreciation.html [Accessed 12 October 2017].
Anon., n.d. What Is Depreciation? [Online] Available at: https://www.profitbooks.net/what-is-depreciation/ [Accessed October 2017
Jan, O., n.d. Asset Retirement Obligation. [Online] Available at: https://accountingexplained.com/financial/non-current-assets/asset-retirement-obligation [Accessed October 2017].
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