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HI5020 CORPORATE ACCOUNTING

Recorded Tutorial 1

CHAPTER 4

Question 1.

Critically examine the three different characteristics of an asset that are outlined in the definition of Assets.

Question 2.

Tea Tree Bay Ltd acquires a Gizmo Machine from Jetsons Ltd for the following consideration:

  Cash  $20 000
    Land  In the books of Tea Tree Bay Ltd the land is recorded at its cost of $100 000. It has a fair value of $140 000.
    Equipment:In the books of Tea Tree Bay Ltd the equipment is recorded at a cost of $50000. The equipment has an accumulated depreciation balance of $20000. The fair value of the equipment is $23000
  Assumption of liabilityTea Tree Bay Ltd also agrees to assume the liability of Jetsons Ltd’s bank loan of $30 000 as part of the Gizmo Machine acquisition.
  Other associated costsTea Tree Bay Ltd also spend $5000 as the installation cost. Testing cost was $2500. Transportation cost for the machine was $700. During first year of operation, the company paid $650 as the maintenance cost for the machine.

REQUIRED

  • Calculate the acquisition cost of the Gizmo Machine that will be used as the base for future depreciation charge.
  • Provide the journal entries that would appear in Tea Tree Bay Ltd’s books to account for the acquisition of the Gizmo Machine
  • Will the maintenance cost be included in the acquisition cost of the machine? Justify your answer.

Question 3:

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 site2 500 500
Power permits400 500
Engineers’ fees1 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:

 $
Dismantling the plant750 500
Environmental remediation costs1 249 500
Replacement of flora and fauna100 000
 2 100 000

Midnight Boil Ltd uses a discount rate of 10 per cent

Required

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.