Lindy Company acquired a machine at a cost of $530,000 on 1 August 2018. The machine had an estimated residual value of $50,000 and an estimated useful life of 8 years. Lindy uses straight-line method of depreciation. The financial year of the company ends on 31 March of each year. On 31 March 2020, the machine was accidentally damaged. It can still operate though at a reduced capacity. It was then expected that the remaining useful life will only be 3 years. The fair value less costs to sell of the machine at 31 March 2020 was $190,000. In addition, it is estimated that the net cash inflows from the machine will be: Year ended 31 March 2021 $155,000 Year ended 31 March 2022 120,000 Year ended 31 March 2023 80,000 Estimated residual value on 31 March 2023 5,000 Lindy Company’s cost of capital is 10%. $155,000 120,000 80,000 5,000 Required: (a) Prepare journal entries to record depreciation expenses on the machine for the years ended 31 March 2019 and 2020. (b) Prepare journal entry to record the impairment loss at 31 March 2020. Calculations should be to the nearest dollar. (c) Prepare an extract of the income statement for the year ended 31 March 2020 and an extract of the statement of financial position as at 31 December 2020 in respect of the machine.
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.
Lindy Company acquired a machine at a cost of $530,000 on 1 August 2018. The machine had an estimated residual value of $50,000 and an estimated useful life of 8 years. Lindy uses straight-line method of
On 31 March 2020, the machine was accidentally damaged. It can still operate though at a reduced capacity. It was then expected that the remaining useful life will only be 3 years. The fair value less costs to sell of the machine at 31 March 2020 was $190,000. In addition, it is estimated that the net
|
Year ended 31 March 2021 |
$155,000 |
| Year ended 31 March 2022 |
120,000 |
| Year ended 31 March 2023 |
80,000 |
| Estimated residual value on 31 March 2023 | 5,000 |
Lindy Company’s cost of capital is 10%.
$155,000 120,000 80,000 5,000
Required:
-
(a) Prepare journal entries to record depreciation expenses on the
machine for the years ended 31 March 2019 and 2020.
-
(b) Prepare
journal entry to record the impairment loss at 31 March 2020.Calculations should be to the nearest dollar.
-
(c) Prepare an extract of the income statement for the year ended 31
March 2020 and an extract of the
statement of financial position as at 31 December 2020 in respect of the machine.
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