Question 3 (13 marks) Murray Bros acquire a bottling machine on 1 July 2013 for
ID: 2413911 • Letter: Q
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Question 3 (13 marks) Murray Bros acquire a bottling machine on 1 July 2013 for $425,000. This machinery is expected to have a useful life of 10 years and a residual of $25,000. The company uses straight line depreciation for the machinery. On 30 June 2015 it is decided to revalue the asset to its fair value of $375,000. From this date, it is determined the remaining useful life is 8 years and residual value still $25,000. On 30 June 2016 the asset is again revalued to its fair value of $265,000. Required: Prepare the journal entries necessary to record the two revaluations for Murray Bros at: 30 June 2014 30 June 2015 and 30 June 2016 2 0Explanation / Answer
The value of the machinery as on 30.06.2014 will be (425000-40000*)=385000.
*Depreciation under straight line method will be calculated as below
Depreciation = value of asset- scrap value/Useful life of asset
=425000-25000/10
= 40000.
There will be any entry for revaluation as on 30.06.2014 as the asset was revaluated for the first only on 30.06.2015. The depreciation entry as on 30.06.2014 will be as follows
Depreciation a/c .dr 40000
To Machine a/c 40000
The value of machinery as on 30.06.2015 will be (425000-80000)= 345000.
Since the asset was revaluated to 375000 according to itd fair value, there is a revaluation gain of 30000 on the asset .
Hence the entry for revaluation as on 30.06.2015 will be
Machine a/c. Dr 30000
To revaluation reserve a/c 30000.
The value of asset as on 30.06.2016 will be (375000- 43750)=331250.
The depreciation for the year 30.06.2015 to 30.06.2016 can be calculated as below.
Depreciation= 375000-25000/8
= 43,750.
The asset was revalued to 265000 as on 30.06.2016.
Hence the revaluation loss will be first adjusted to revaluation reserve. So, the entry for revaluation as on 30.06.2016 will be as follows.
Revaluation reserve a/c Dr 30000
Profit &loss a/c. Dr 36250
To Machine a/c . 66250.
The above revaluation loss can be calculated as fair value - book value of asset as on 30.06.2016 i.e., 331250-265000= 66250.
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