Tops Ltd. has decided to use the revaluation model for its factory building and

Question

Tops Ltd. has decided to use the revaluation model for its factory building and the cost model for its manufacturing equipment. Tops Ltd also owns additional land that it does not occupy but holds as an investment. Assume that at the end of 2010, the market values of each asset exceeded its original cost. On its Balance Sheet, the company categorises its non-current assets into PP & E and Investment Property.

2. Assume the total cost of the manufacturing equipment on 1 October 2010, the date used for the start of depreciation, was $60,000. There is no estimated residual value, and the useful life for purposes of straight-line depreciation is 20 years. On March 31, 2011, a component part of the equipment with an allocated cost of $12,000 and a 20 year useful life was replaced with a better component costing $15,000. A trade-in allowance of $8,000 was granted for the old component, and the difference was paid in cash. Depreciation had last been recorded on December 31, 2010. Prepare all necessary journal entries related to the event on March 31, 2011.

Explanation / Answer

Since depreciation has been recorded on December 31 2010, we need to account for another 3 monts depreciation on March 31 2011. Depreciation per year = 60000/20 = $3000 Depreciation for 3 months = 3000 x 3/12 = $750 We need to remove the depreciation from accumulated depreciation for the diposed asset. The accumulated depreciation will be 12000/20 x 6/12 =$300 Next, since the disposed asset is exchanged with another component, there is a reduction in cash of $15000 - 8000 = $7000 When the asset is disposed, we need to compute the loss/profit on disposal. Loss on disposal = Cost - Acc Depreciation - trade in allowance = 12000 - 300 - 8000 = $3700 So, now lets figure on the double entry Depreciation expenses record Dr Depreciation $750 Cr Accumulated Depreciation 750 Transfer of accumulated depreciation to the disposal account Dr Accumulated Depreciation 300 Cr Disposal 300 Transfer of cost of disposed asset to disposal account Dr Disposal 12000 Cr Property plant and equipment 12000 Record the purchase of new asset by trade in Dr Property plant and equipment 15000 Cr Cash 7000 Cr Disposal 8000 Record loss on disposal on income statement Dr Loss on Disposal (Income Statement) 3700 Cr Disposal 3700 Hope this helps!

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