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y management. Produ on a straight-line basis hent indicator review w

y management. Produ on a straight-line basis hent indicator review w

FINANCIAL ACCOUNTING
FINANCIAL ACCOUNTING
10th Edition
ISBN:9781259964947
Author:Libby
Publisher:Libby
Chapter1: Financial Statements And Business Decisions
Section: Chapter Questions
Problem 1Q
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QUESTION 2 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. Show all calculations. Round all amounts to the nearest rand.
Transcribed Image Text:QUESTION 2 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. Show all calculations. Round all amounts to the nearest rand.
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