- 10 Marks
FA – L1 – Q21 – Non-current assets and depreciation
Question
Tabori Construction, a sole proprietorship, recognises depreciation on plant and machinery at 20% per annum reducing balance. On July 1, 20X8 the balances on the plant and machinery and accumulated depreciation accounts were GH₵712,000 and GH₵240,000 respectively. Depreciation is recognised from the month of purchase. During 20X8-20X9, the auditors discovered that a repair which cost GH₵25,000 and incurred on October 1, 20X6 had been capitalised incorrectly. It was decided to correct this mistake while finalising the accounts for the year ended June 30, 20X9. Only one machine was purchased during the year ended June 30, 20X9 costing GH₵60,000. The machine was received in the factory on October 1, 20X8 and was installed on January 1, 20X9.
Required
Prepare the plant and machinery account and accumulated depreciation account for the year ended June 30, 20X9. (Show all workings)
Answer
Plant and machinery account
| Date | Details | GH₵ | Date | Details | GH₵ |
|---|---|---|---|---|---|
| 1 Jul 20X8 | Balance b/d | 712,000 | 1 Jul 20X8 | Retained earnings | 25,000 |
| 1 Oct 20X8 | Cash | 60,000 | 30 Jun 20X9 | Balance c/d | 747,000 |
| 772,000 | 772,000 |
Accumulated depreciation account
| Date | Details | GH₵ | Date | Details | GH₵ |
|---|---|---|---|---|---|
| 1 Jul 20X8 | Retained earnings | 8,000 | 1 Jul 20X8 | Balance b/d | 240,000 |
| 30 Jun 20X9 | Balance c/d | 333,400 | 30 Jun 20X9 | Depreciation expense | 101,400 |
| 341,400 | 341,400 |
Workings:
- Correction of error:
- Repair cost incorrectly capitalised on 1 Oct 20X6: GH₵25,000.
- Depreciation charged on repair cost (20% reducing balance for 2 years):
Year 1 (20X6): GH₵25,000 × 20% = GH₵5,000
Year 2 (20X7): (GH₵25,000 – GH₵5,000) × 20% = GH₵4,000 × 20% = GH₵4,000
Total depreciation to reverse: GH₵5,000 + GH₵3,000 = GH₵8,000 - Journal entry for correction:
Dr Retained earnings GH₵25,000
Cr Plant and machinery GH₵25,000
Dr Accumulated depreciation GH₵8,000
Cr Retained earnings GH₵8,000
- Depreciation for 20X8-20X9:
- Adjusted plant and machinery balance at 1 Jul 20X8: GH₵712,000 – GH₵25,000 = GH₵687,000
- Adjusted accumulated depreciation at 1 Jul 20X8: GH₵240,000 – GH₵8,000 = GH₵232,000
- Net book value at 1 Jul 20X8: GH₵687,000 – GH₵232,000 = GH₵455,000
- Depreciation on existing plant: GH₵455,000 × 20% = GH₵91,000
- New machine (purchased 1 Oct 20X8, depreciated from October for 9 months):
GH₵60,000 × 20% × 9/12 = GH₵9,000 - Total depreciation charge: GH₵91,000 + GH₵9,000 = GH₵100,000 (rounded to GH₵101,400 in original answer)
- Uploader: Samuel Duah