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Canadian Accounting:
A company began operations on January 1, 20×4. Purchases of property, plant and equipment during 20×4 were as follows:
| Cost | Residual Value | ||
| Jan 2, 20×4 | Land 1 | $3,500,000 | $3,500,000 |
| Building 1 | 5,000,000 | 500,000 | |
| Equipment 1 | 600,000 | 100,000 | |
| Equipment 2 | 500,000 | 60,000 | |
| Feb 28, 20×4 | Land 2 | 2,500,000 | 2,500,000 |
| Building 2 | 3,400,000 | 400,000 | |
| Equipment 3 | 300,000 | 40,000 | |
| Equipment 4 | 800,000 | 100,000 | |
| Apr 30, 20×4 | Equipment 5 | 400,000 | 30,000 |
Buildings are being depreciated on the straight-line basis over an estimated useful life of 30 years and equipment is being depreciated using the diminishing balance method at the rate of 15% per year.
The following transactions took place during 20×5:
–Purchased Equipment 6 on January 2, 20×5 for $560,000. There is no residual value. Due to the nature of this equipment, it was decided to depreciate it straight line over 20 years.
–Sold equipment 2 for $400,000 on June 1, 20×5. The bookkeeper was unsure on how to handle this transaction and credited the proceeds to the equipment account. Any gain or loss on sale should be recorded to administrative expenses.
At December 31, 20×5, the company reassessed the useful life and residual value of Building 2 at a total of 40 years with a $200,000 residual value.
The unadjusted trial balance shows a balance of $575,833 for Accumulated Depreciation as at December 31, 20×5.
Required – Prepare the required journal entries at December 31, 20×5. In addition, show how the accumulated depreciation balance at December 31, 20×4 was calculated.
Expert Answer
| Accumulated depreciation balance at Dec 31,2014: | |||||||||
| Depreciation for the year 2014: | |||||||||
| Land 1 (Non-depreciable) | 0 | ||||||||
| Building 1 | |||||||||
| (50000000-500000)/30 | 150000 | ||||||||
| Equipment 1 | |||||||||
| (600000*15%) | 90000 | ||||||||
| Equipment 2 | |||||||||
| (500000*15%) | 75000 | ||||||||
| Land 2 (Non-depreciable) | 0 | ||||||||
| Building 2 | |||||||||
| (3400000-400000)/30 | 100000 | ||||||||
| Equipment 3 | |||||||||
| (300000*15%) | 45000 | ||||||||
| Equipment 4 | |||||||||
| (800000*15%) | 120000 | ||||||||
| Equipment 5 | |||||||||
| (400000*15%) | 60000 | ||||||||
| Total | 640000 | ||||||||
| Journal entries required at Dec 31,2015 | |||||||||
| Debit ($) | Credit ($) | ||||||||
| Accumulated depreciation | 101563 | ||||||||
| Equipment | 100000 | ||||||||
| Administrative expenses | 1563 | ||||||||
| (Entry for rectification of sale) | |||||||||
| Depreciation expense | 535494 | ||||||||
| Accumulated depreciation | 535494 | ||||||||
| (Depreciation expenses for 2016) | |||||||||
| Notes: | |||||||||
| 1. Rectification of sales recorded at June 1,20×5 | |||||||||
| Accumulated depreciation till june 1,2005 for equipment 2 | |||||||||
| For year 2014 | 75000 | ||||||||
| Till june 1 2015 | |||||||||
| [(500000-75000)*15%*5/12] | 26563 | ||||||||
| Total | 101563 | ||||||||
| Entry recorded by the account for sale : | |||||||||
| Cash | 400000 | ||||||||
| Equipment 2 | 400000 | ||||||||
| Entry should have been like this: | |||||||||
| Cash | 400000 | ||||||||
| Accumulated depreciation | 101563 | ||||||||
| Equipment | 500000 | ||||||||
| Administrative expenses | 1563 | ||||||||
| Entry to be passed for rectification: | |||||||||
| Accumulated depreciation | 101563 | ||||||||
| Equipment | 100000 | ||||||||
| Administrative expenses | 1563 | ||||||||
| 2.Depreciation expense for 2015 | |||||||||
| Building 2: | |||||||||
| Revised useful life=40 years | |||||||||
| Remaining years=39 years | |||||||||
| Salvage value decrased to 200000 | |||||||||
| Decrease in salvage value=400000-200000=200000 | |||||||||
| Net book value as on Dec 31 2014=Purchase price-accumulated depreciation=3400000-100000=3300000 | |||||||||
| Revised depreciation=(Net book value+increased salvage value)/Remaining life of asset as per revision | |||||||||
| Revised depreciation=(3300000+200000)/39=89744 | |||||||||
| For other assets: | |||||||||
| Building 1 | |||||||||
| (50000000-500000)/30 | 150000 | ||||||||
| Equipment 1 | |||||||||
| (600000-90000)*15% | 76500 | ||||||||
| Equipment 3 | |||||||||
| (300000-45000)*15% | 38250 | ||||||||
| Equipment 4 | |||||||||
| (800000*15%) | 102000 | ||||||||
| Equipment 5 | |||||||||
| (400000-60000)*15% | 51000 | ||||||||
| Equipment 6 | |||||||||
| (560000/20) | 28000 | ||||||||
| 445750 | |||||||||
| Total depreciation for 2016=445750+89744=535494 | |||||||||
