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Problem 1 (6 Marks)
On 1 January 2015, KZ Ltd purchased equipment for a total cost of $55,000. The estimated
useful life of the equipment was 8 years, with an estimated residual value of $5,000. The
entity's reporting period ends on 30 June, and it uses straight-line depreciation. On 1 July
2017, KZ Ltd revalued the equipment upwards to reflect the fair value of $70,000. The
revised useful life was 7 years and residual value was estimated at $nil. On 1 January 2019,
KZ Ltd sold the equipment for $56,500.
Prepare the following journal entries (assuming no GST):
a) journal entries on 1 July 2017 for the revaluation of the equipment.
b) Journal entry on 30 June 2018 for the depreciation expense.
c) Journal entries on 1 January 2019 for the sale of the equipment.
Solution:
KZ'td

Respuesta :

anthougo

The Journal Entries are as follows:

a) 1 July 2017:

Debit Equipment Revaluation $39,375

Debit Accumulated Depreciation $15,625

Credit Equipment $55,000

  • To transfer the accounts to Equipment Revaluation account.

Debit Equipment $70,000

Credit Equipment Revaluation $70,000

  • To record the revaluation of the equipment.

b) 30 June 2018:

Debit Depreciation Expense $12,727

Credit Accumulated Depreciation $12,727

  • To record depreciation expense for the year.

c) 1 January 2019:

Debit Cash $56,500

Credit Sale of Equipment $56,500

  • To record the sale of the equipment.

Debit Sale of Equipment $70,000

Credit Equipment $70,000

  • To transfer the equipment to sale of equipment account.

Debit Accumulated Depreciation $19,091

Credit Sale of Equipment $19,091

  • To transfer accumulated depreciation to Sale of equipment account.

Debit Equipment Revaluation $30,625

Credit Income Summary $30,625

  • To transfer the surplus on equipment revaluation.

Data Analysis:

1 Jan. 2015 Equipment Purchase = $55,000

Estimated useful life = 8 years

Estimated residual value = $5,000

Depreciation amount = $50,000 ($55,000 - $5,000)

Annual depreciation expense based on straight-line method = $6,250 ($50,000/8)

Accumulated depreciation for 2.5 years (January 2015 to June 2017) = $15,625 ($6,250 x 2.5)

1 July 2017 Book value of equipment = $39,375 ($55,000 - $15,625)

Fair value of equipment = $70,000

Revaluation Surplus = $30,625

Revised useful life = 7 years

Remaining useful life = 5.5 years (7 - 2.5)

Estimated residual value = $0

Annual depreciation expense = $12,727 ($70,000/5.5)

1 January 2019:

Accumulated depreciation for 1.5 years = $19,091 ($12,727 x 1.5)

Sales proceeds = $56,500

Gain from sale of equipment = $5,591

Thus, the gain on sale of equipment of $5,591 will be recognized at the end of the year.

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