Question
Entity A is a listed company in Hong Kong that hires out motor trucks to its part-time drivers to generate revenue. The draft accounts at
Entity A is a listed company in Hong Kong that hires out motor trucks to its part-time drivers to generate revenue.
The draft accounts at the end of the reporting period of 31 December 2019 included the motor trucks which were bought on 1 January 2017. The economic life of the motor trucks is 6 years.
These motor trucks were purchased from Entity B on credit. The listed price was $9,859,375.
Entity B always provides a trade discount of 4.00% to Entity A due to its good business relationship. Under the contract, it will be settled by cheque on 15 January 2017 and 15 March 2017 by two payments of 70.00% and 30.00% respectively.
Entity A is also responsible for disposing of these motor trucks to the scrap yard for recycling after 6 years. The removal cost of $106,600 will be incurred on 31 December 2022.
The delivery cost of $25,028 was incurred on 1 January 2017 by paying a cheque to Entity C.
On 31 December 2019, due to the world trade war, Entity A expected the market would move downward starting from 1 January 2020. On one hand, Entity A estimated that it was able to generate cash inflows of $1,560,000, $1,200,000 and $3,200,200 in the Year 2020, 2021 and 2022 respectively.
It will then be scrapped on 31 December 2022. On the other hand, these motor trucks could be sold immediately on 31 December 2019 for $4,600,000 and selling costs of $45,600 were also incurred.
On 31 December 2020, Entity A expected the market would move upward again because quite a lot of positive news of the world trade war were observed recently.
Entity A estimated that it was able to generate $1,805,000 and $4,500,000 cash in the Year 2021 and 2022 respectively. It will then be scrapped on 31 December 2022.
Furthermore, these motor trucks could be sold immediately on 31 December 2020 for $5,600,000 and selling costs of $49,600 were also incurred.
On 31 December 2021, Entity A estimates no further impairment loss should be charged.
Due to a shortage of cash, on 30 June 2022, Entity A sold these motor trucks to Entity D which is an independent third party.
Entity D paid the agreed price of $750,000 by a post-dated cheque of 1 July 2022 on 30 June 2022. Entity A deposited the cheque on 2 July 2022.
Entity A adopts a straight-line method for depreciation of motor trucks as the corporate accounting policy.
Discount rates are 9.75%, 12.00% and 10.00% for applying on 1 January 2017, 31 December 2019 and 31 December 2020 respectively. The end of the reporting period is 31 December.
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