Diamond Ltd acquired an item of polishing equipment on 1 July 2015 for $440,000. The equipmentis expected to have a useful life of 10 years and the straight-line method of depreciation is to be uşed. 'It has salvage value of $40,000. On 1 July 2017, the equipment is deemed to have a fair valye of $424,000 and revaluation is undertaken in accordance with the Diamond Ltd policy of measuring property, plant and equipment at fair value. The asset is still usable for next 8 years but the salvage value is determined to be zero. The asset is sold for $356,000 on 1 July 2019. Required: Provide the journal entries necessary at the following dates to account for the above transactions and events. (Ignore narrations). Show your working. (10 marks) 01/07/2015 01/07/2017 01/07/2019
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
Annual Depreciation on equipment =(Cost of the assets - Salvage value) / Useful life of the assets
=(440000-40000)/10 = $40,000
Depreciation for period 01/7/2015 to 01/7/2015 = 2 year*$40000 = $80,000
Book value of the equipment as on 01/7/2017 = Cost - accumulated depreciation
= $440000-80000 = $360,000
Revaluation surplus = $424000-360000= $64,000
Depreciation after revaluation = (Cost of the assets - Salvage value) / Useful life of the assets
= (424000-0)/8 = $53,000
Depreciation for period 01/7/2017 to 01/7/2019= Cost - accumulated depreciation
= 2 years*$53000 = $106,000
Book value at 01/7/2019 = $424000-106000 = $318,000
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