Question on Financial Accounting

Part 1
Rockhampton Ltd has acquired a new machine, which it has had installed in its factory. Which of the following items should be capitalized into the cost of the building?

(a) Labour and travel costs for managers to inspect possible new machines and for negotiating for a new machine
(b) Freight costs and insurance to get the new machine to the factory
(c) Costs for renovating a section of the factory, in anticipation of the new machine’s arrival, to ensure that all the other parts of the factory will have easy access to the new machine
(d) Cost of cooling equipment to assist in the efficient operation of the new machine.
(e) Costs of repairing the factory door, which was damaged by the installation of the new machine
(f) Training costs of workers who will use the machine
Provide a one sentence explanation giving the reason for capitalizing or expending, in each case.

Part 2

Maryborough Ltd has acquired a new building for $500 000. It has incurred incidental costs of $10 000 in the acquisition process for legal fees, real estate agent ‘s fees and stamp duties. Management believes that these costs should be expended because they have not increased the value of the building and if the building was immediately resold, these amounts would not re recouped. In other words, the fair value of the building is considered to still be $500 000.
Explain how Maryborough Ltd should account for the $510000 it has expended with respect to the building.

Part 3

Albany Trading operates in a very competitive field. To maintain its market position, it purchased two new machines for cash on 1 January 2008. It had previously rented its machines. Machine A cost $40 000 and machine B cost $100 000. Each machine was expected to have a useful life of 10 years and residual values were estimated at $2000 for machine A and $5000 for machine B.
On 30 June 2009 Albany Trading adopted the revaluation model to account for the class of machinery. The fair values of machine A and machine B were determined to be $34000 and $90000 respectively on that date. The useful life of each machine was now considered to be eight years, the residual value of machine A was deemed to be unchanged but machine B’s estimated residual value was adjusted to $9000.
Due to technological advances, Albany Trading decided to replace machine A. It traded in machine A on 31 March 2010 for new machine C, which cost $63 000. A $28 000 trade-in was allowed for machine A and the balance of machine C’s cost was paid in cash. Transport and installation costs of $1000 were incurred in respect to machine C. Machine C was expected to have a useful life of eight years and a residual value of $8000.
Albany Trading uses the straight line depreciation method, recording depreciation to the nearest month and the nearest dollar. Its reporting date is 30 June. On 30 June 2010 fair values were determined to be $140 000 and $65 000 for machines B and C respectively.
(a) Prepare general journal entries to record the above transactions and the depreciation journal entries required on each reporting date up to 30 June 2010. (Narrations are not required but show all workings.)
(b) Explain why depreciation is still being charged for the machines even though they are now being measured under the revaluation model.
(c) What is an asset’s ‘useful life’ and how is it determined?


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Education : Question on Financial Accounting
Question on Financial Accounting
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