On 1 January 2009, SmartQuick Limited acquired a plant at a cost price of N$2.4 million. On the date of purchase, the useful life of the plant was estimated at eight years from the date of use, with a residual value of N$110 000. The plant was immediately ready for use as intended by management. Production only started on 15 May 2009. The plant was depreciated on a straight-line basis over its useful life. An impairment indicator review was performed at the end of the 2012, and a possible impairment was identified. Management expects that the plant will generate a net cashflow of N$145 000 per annum (before tax) during the remaining useful life of the asset. At the end of the useful life, the plant will be sold for N$110 000. Assume all cashflows occur at the end of each year. An appropriate after tax discount rate is 7.5%. On 27 December 2012, a new environmental law was inacted by parliament that limits the remaining useful life of the plant to four years. An independent sworn appraiser was contracted by SmartQuick and he valued the plant at a fair value price of N$480 000 on 31 December 2012. Brokers indicated that they would charge a fee of 3% of the fair value as commission on a sales transaction. The tax rate for the company is 28%. REQUIRED: Prepare the journal entries relating to the plant for the year ended 31 December 2012. (12) Show all calculations. Round all amounts to the nearest rand
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.
On 1 January 2009, SmartQuick Limited acquired a plant at a cost price of N$2.4 million. On
the date of purchase, the useful life of the plant was estimated at eight years from the date of
use, with a residual value of N$110 000. The plant was immediately ready for use as
intended by management. Production only started on 15 May 2009. The plant was
An impairment indicator review was performed at the end of the 2012, and a possible
impairment was identified. Management expects that the plant will generate a net cashflow
of N$145 000 per annum (before tax) during the remaining useful life of the asset. At the end
of the useful life, the plant will be sold for N$110 000. Assume all cashflows occur at the end
of each year. An appropriate after tax discount rate is 7.5%.
On 27 December 2012, a new environmental law was inacted by parliament that limits the
remaining useful life of the plant to four years. An independent sworn appraiser was
contracted by SmartQuick and he valued the plant at a fair value price of N$480 000 on
31 December 2012. Brokers indicated that they would charge a fee of 3% of the fair value as
commission on a sales transaction.
The tax rate for the company is 28%.
REQUIRED:
Prepare the
Show all calculations.
Round all amounts to the nearest rand
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