Green Ltd. Green Ltd. is a mobile phone operator and successful mobile phone manufacturer in Hong Kong. To maintain its market position, it purchased Machine X for cash on 1 January 2013. Machine X costed $80,000 and was expected to have a useful life of 10 years and no residual value at the end of its estimated useful life. On 31 December 2014, Green Ltd. revaluated all of its machines. The fair value of Machine X was $70,000 on that day. Owing to technological advancement, Green Ltd. decided to replace Machine X. It traded in Machine X for Machine C on 1 July 2015. The cost of Machine C was $128,000. A $56,000 trade-in was allowed for Machine X and the balance of Machine C’s cost was paid in cash. Transport and installation costs of $2,000 were incurred in respect to Machine C. Machine C was expected to have a useful life of 8 years and no residual value at the end of its estimated useful life. The accounting policy of Green Ltd. requires the company to use revaluation model for all of its machines. Revaluation surplus balance has to be transferred to retained earnings when the asset is disposed. Green Ltd. also uses straight-line depreciation method for all properties, plants and equipment. The end of its reporting period is 31 December. (a) Prepare accounting journal entries with narratives to record the transactions related to Machine X and Machine C from 2013 to 2015. Show your workings. (b) Green Ltd. has another machine purchased in 2012. This machine is very difficult to get and has increased in value over the current period. Management has the view that, as there has been no decline in fair value, no depreciation should be charged on it.
Green Ltd.
Green Ltd. is a mobile phone operator and successful mobile phone manufacturer in Hong Kong. To maintain its market position, it purchased Machine X for cash on 1 January 2013. Machine X costed $80,000 and was expected to have a useful life of 10 years and no residual value at the end of its estimated useful life.
On 31 December 2014, Green Ltd. revaluated all of its machines. The fair value of Machine X was $70,000 on that day.
Owing to technological advancement, Green Ltd. decided to replace Machine X. It traded in Machine X for Machine C on 1 July 2015. The cost of Machine C was $128,000. A $56,000 trade-in was allowed for Machine X and the balance of Machine C’s cost was paid in cash. Transport and installation costs of $2,000 were incurred in respect to Machine C. Machine C was expected to have a useful life of 8 years and no residual value at the end of its estimated useful life.
The accounting policy of Green Ltd. requires the company to use revaluation model for all of its machines. Revaluation surplus balance has to be transferred to
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(a) Prepare accounting
journal entries with narratives to record the transactions related to Machine X and Machine C from 2013 to 2015. Show your workings. -
(b) Green Ltd. has another machine purchased in 2012. This machine is very difficult to get and has increased in value over the current period. Management has the view that, as there has been no decline in fair value, no depreciation should be charged on it.
Do you agree with management’s view? Explain with two reasons.
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