Financial Statements includes information regarding the income, expenses, assets and liabilities of the company. One of such information is depreciation on the fixed assets of the company. Depreciation is an important expense as it helps in reflecting the true and fair picture of the fixed assets of the company.
Depreciation is the reduction in value of the assets due to the assets usage over the period of time, technology obsolesces and other wear and tear to the asset. Hence, calculation of accurate depreciation is an important aspect (ProfitBooks.net, 2018).
While preparing the first set of financial statements, the company needs to decide on various factors in order to calculate depreciation. These factors are (Realassetmgt.com, 2018):
- Useful life – This represents the number of life the company is expected to use the assets or the number of life till the asset will work effectively without incurring any heavy cost over it.
- Cost – This represents the cost of assets incurred to put it to use or getting it ready for the intended purpose or production. These costs include the purchase price, installation cost, transportation cost, taxes and duties levied on purchase cost, etc.
- Salvage value – This represents the residual value or scrap value that the company will be able to get at the end of the assets life, by selling it. The scrap value is an important aspect while calculating the depreciation as the formula for calculating the depreciation is
(Cost – Scrap Value)/useful life
- Method of depreciation – Another important matter while calculating the depreciation is selection of method for depreciation. As per AASB, there are 3 methods which can be used for calculating the depreciation. These methods are straight line method, reducing balance method and units of production method. The company needs to select the most appropriate method as per their line of business.
Solution-2
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In the books of Midnight Boil Ltd. |
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Journal Entries |
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Date |
Particulars |
Debit ($) |
Credit ($) |
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30-Jun-18 |
CWIP |
12,550,000 |
|
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To Cash |
12,550,000 |
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(To record expenses incurred on construction) |
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30-Jun-18 |
CWIP |
4,001,500 |
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To Cash |
4,001,500 |
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(To record expenses incurred on construction) |
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01-Jul-18 |
Nuclear Power Generator |
16,551,500 |
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To CWIP |
16,551,500 |
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(To record asset recognized in books upon completion of construction) |
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01-Jul-18 |
Nuclear Power Generator |
809,641 |
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To Provision for Asset Retirement Obligation |
809,641 |
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(To record provision for dismantling cost) |
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30-Jun-19 |
Interest expense |
80,964 |
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To Provision for Asset Retirement Obligation |
80,964 |
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(To record interest expenses on dismantling cost) |
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30-Jun-24 |
Interest expense (refer WN-1) |
130,393 |
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To Provision for Asset Retirement Obligation |
130,393 |
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(To record interest expenses on dismantling cost) |
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WN-1 Calculation of Interest expenses
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For the year ended |
Interest expenses |
Provision for dismantling cost |
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30-Jun-18 |
– |
809,641 |
|
30-Jun-19 |
80,964 |
890,605 |
|
30-Jun-20 |
89,060 |
979,665 |
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30-Jun-21 |
97,967 |
1,077,632 |
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30-Jun-22 |
107,763 |
1,185,395 |
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30-Jun-23 |
118,540 |
1,303,935 |
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30-Jun-24 |
130,393 |
1,434,328 |
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30-Jun-25 |
143,433 |
1,577,761 |
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30-Jun-26 |
157,776 |
1,735,537 |
|
30-Jun-27 |
173,554 |
1,909,091 |
|
30-Jun-28 |
190,909 |
2,100,000 |
Solution-3
- Calculation of Gross Profit
|
Particulars |
2015 |
2016 |
2017 |
|
Contract Price |
50,000,000 |
50,000,000 |
50,000,000 |
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Less: Cost for the year |
10,000,000 |
28,000,000 |
40,000,000 |
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Less: Estimated costs to complete |
28,000,000 |
12,000,000 |
– |
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Total |
38,000,000 |
40,000,000 |
40,000,000 |
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Estimated Profit |
12,000,000 |
10,000,000 |
10,000,000 |
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Percentage completed |
26.32% |
70.00% |
100.00% |
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Profit recognized for the year |
3,157,895 |
3,842,105 |
3,000,000 |
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(b) |
Journal entries for the 2015 financial year using the percentage-of-completion method |
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Particulars |
Debit ($) |
Credit ($) |
|
CWIP |
10,000,000 |
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To Expenses |
10,000,000 |
|
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(To record expense incurred on construction) |
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CWIP |
3,157,895 |
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Construction expenses |
10,000,000 |
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To Income from Contract |
13,157,895 |
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(To record income and profit from construction) |
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Accounts receivable |
12,000,000 |
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To CWIP |
12,000,000 |
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(To record invoicing of client for construction contract) |
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Cash |
11,000,000 |
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To Accounts receivable |
11,000,000 |
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(To record amount received from the client) |
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(c) |
Journal entries for the 2015 financial year, assuming the stage of completion cannot be reliably assessed |
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Particulars |
Debit ($) |
Credit ($) |
|
CWIP |
10,000,000 |
|
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To Expenses |
10,000,000 |
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(To record expense incurred on construction) |
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Construction expenses |
10,000,000 |
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To Income from Contract |
10,000,000 |
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(To record income from construction) |
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Accounts receivable |
12,000,000 |
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To CWIP |
12,000,000 |
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(To record invoicing of client for construction contract) |
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Cash |
11,000,000 |
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To Accounts receivable |
11,000,000 |
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(To record amount received from the client) |
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CWIP |
2,000,000 |
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To Contract Liability |
2,000,000 |
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(To record amount invoiced over cost booked as liability) |
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Solution-4
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(a) |
The Journal entry to account for impairment of goodwill |
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Particulars |
Debit ($) |
Credit ($) |
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Impairment Loss (refer WN-1) |
800,000 |
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To Accumulated Impairment Loss – Goodwill |
800,000 |
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(To record Impairment loss) |
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WN-1 |
Calculation of Impairment loss |
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Impairment loss is excess of carrying amount from recoverable amount.
Value of Goodwill as on 1st Jul-18 |
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Cash Paid |
7,000,000 |
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Less: Carrying value of the net assets |
5,800,000 |
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Goodwill |
1,200,000 |
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Value of Goodwill as on 30th Jun-19 |
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Recoverable amount of CGU |
6,200,000 |
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Less: Carrying value of the net assets |
5,800,000 |
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Goodwill balance as on 30th Jun-19 |
400,000 |
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Impairment loss (1,200,000 – 400,000) |
800,000 |
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(b) |
The Journal entry to account for impairment |
|
Particulars |
Debit ($) |
Credit ($) |
|
Impairment Loss (refer WN-1) |
2,200,000 |
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To Accumulated Impairment Loss – Goodwill |
1,200,000 |
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To Customer List |
8,333 |
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To Machinery |
241,667 |
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To Buildings |
250,000 |
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To Land |
500,000 |
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(To record Impairment loss) |
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WN-1 |
Calculation of Impairment loss |
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Recoverable amount of CGU |
4,800,000 |
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Less: Carrying value of the net assets including goodwill |
7,000,000 |
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Impairment Loss |
(2,200,000) |
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This loss of $2,200,000 will first be applied to write off goodwill. |
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Impairment loss |
2,200,000 |
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Less: Goodwill to be written off |
1,200,000 |
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Balance assets to be written off |
1,000,000 |
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This balance will be shared among other assets in their ratio proportionate to carrying amount. |
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Assets |
Carrying Amount |
Allocation ratio |
Allocation of Impairment Loss |
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Customer List |
50,000 |
0.83% |
8,333 |
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Machinery |
1,450,000 |
24.17% |
241,667 |
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Buildings |
1,500,000 |
25.00% |
250,000 |
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Land |
3,000,000 |
50.00% |
500,000 |
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Total |
6,000,000 |
100.00% |
1,000,000 |
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References:
ProfitBooks.net. (2018). What Is Depreciation – Types, Formula & Calculation Methods For Small Businesses Accounting.
Realassetmgt.com. (2018). 5 Factors required for accurate depreciation.
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