Exercise 11-23 The information that follows relates to equipment owned by Bonita Limited at December 31, 2017: Cost $7,830,000 Accumulated depreciation to date 870,000 Expected future net cash flows (undiscounted) 6,090,000 Expected future net cash flows (discounted, value in use) 5,524,500 Fair value 5,394,000 Costs to sell (costs of disposal) 43,500 At December 31, 2017, Bonita discontinues use of the equipment and intends to dispose of it in the coming year by selling it to a competitor. It is expected that the costs of disposal will total $43,500. Assume that Bonita is a private company that follows ASPE. Prepare the journal entry at December 31, 2017, to record asset impairment, if any. 2. Prepare the journal entry to record depreciation expense for 2018. 3. Assume that the asset was not sold by December 31, 2018. The equipment’s fair value (and recoverable amount) on this date is $5.655 million. Prepare the journal entry, if any, to record the increase in fair value. It is expected that the costs of disposal will total $43,500. Repeat the requirements in (a) above assuming that Bonita is a public company that follows IFRS, and that the asset meets all criteria for classification as an asset held for sale.
Reporting Cash Flows
Reporting of cash flows means a statement of cash flow which is a financial statement. A cash flow statement is prepared by gathering all the data regarding inflows and outflows of a company. The cash flow statement includes cash inflows and outflows from various activities such as operating, financing, and investment. Reporting this statement is important because it is the main financial statement of the company.
Balance Sheet
A balance sheet is an integral part of the set of financial statements of an organization that reports the assets, liabilities, equity (shareholding) capital, other short and long-term debts, along with other related items. A balance sheet is one of the most critical measures of the financial performance and position of the company, and as the name suggests, the statement must balance the assets against the liabilities and equity. The assets are what the company owns, and the liabilities represent what the company owes. Equity represents the amount invested in the business, either by the promoters of the company or by external shareholders. The total assets must match total liabilities plus equity.
Financial Statements
Financial statements are written records of an organization which provide a true and real picture of business activities. It shows the financial position and the operating performance of the company. It is prepared at the end of every financial cycle. It includes three main components that are balance sheet, income statement and cash flow statement.
Owner's Capital
Before we begin to understand what Owner’s capital is and what Equity financing is to an organization, it is important to understand some basic accounting terminologies. A double-entry bookkeeping system Normal account balances are those which are expected to have either a debit balance or a credit balance, depending on the nature of the account. An asset account will have a debit balance as normal balance because an asset is a debit account. Similarly, a liability account will have the normal balance as a credit balance because it is amount owed, representing a credit account. Equity is also said to have a credit balance as its normal balance. However, sometimes the normal balances may be reversed, often due to incorrect journal or posting entries or other accounting/ clerical errors.
Exercise 11-23
| Cost | $7,830,000 | |
| 870,000 | ||
| Expected future net |
6,090,000 | |
| Expected future net cash flows (discounted, value in use) | 5,524,500 | |
| Fair value | 5,394,000 | |
| Costs to sell (costs of disposal) | 43,500 |
At December 31, 2017, Bonita discontinues use of the equipment and intends to dispose of it in the coming year by selling it to a competitor. It is expected that the costs of disposal will total $43,500.
| Prepare the |
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| 2. |
Prepare the journal entry to record depreciation expense for 2018. | |
| 3. |
Assume that the asset was not sold by December 31, 2018. The equipment’s fair value (and recoverable amount) on this date is $5.655 million. Prepare the journal entry, if any, to record the increase in fair value. It is expected that the costs of disposal will total $43,500. |
Repeat the requirements in (a) above assuming that Bonita is a public company that follows IFRS, and that the asset meets all criteria for classification as an asset held for sale.
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