Question
You are the financial manager of Woods Proprietary Limited. The company has a 30 June year-end. On 1 March 2015, the company bought a new
You are the financial manager of Woods Proprietary Limited. The company has a 30 June year-end.
On 1 March 2015, the company bought a new wood cutting machine. The transaction had the following details:
Note | Rand | |
Purchase price | 1 | 2000000 |
Delivery cost | 50 000 | |
Installation cost | 25 000 | |
Costs of testing | 2 | 20 000 |
Pre-production cost | 3 | 18 000 |
Initial operating losses | 4 | 35 000 |
Administrative cost | 5 | 8000 |
Additional information: 1.) The purchase price was paid in full on 1 March 2015.
2.) The cost of testing relates to expenses incurred while testing the machine to determine whether the machine is functioning correctly. The samples produced during the trial were sold at net proceeds of R5 000.
3.) The pre-production cost relates to costs incurred to bring the machine to the condition necessary to be able to operate properly and in the manner intended.
4.) The initial operating losses relate to losses made due to the initial small quantities produced.
5.) The administrative costs are all of a general and indirect nature.
6.) Assume that a liability to dismantle and remove the machine at the end of its useful life exists. This cost is estimated at R20 000, and the discounted present value equals R12 000.
7.) The machine was ready for use on 1 April 2015 and was put to use immediately.
8.) The machine will be depreciated using the straight-line method over its estimated useful life of 15 years.
9.) Management estimates the residual value of the machine to be R140 000.
10.) At each of the previous year-ends, the useful life and residual value were re-viewed, and it was found that the initial estimates were still applicable.
11.) At the beginning of the 2020 financial year, a review of the useful life and residual value showed that the machine had a useful life of 20 years and a residual value of R100 000.
Required: a.) Calculate the cost at which the machine will be recognized in the records of Woods Proprietary Limited on 1 March 2015. (9 marks)
b.) Calculate the carrying amount of the machine as at 30 June 2019. (9 marks)
c.) Calculate and prepare the journal entries to account for the depreciation for the year ended 30 June 2020.(7 marks)
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