1.On 1 July 2019, CRX Construction Ltd paid $150,000 cash to acquire an item of plant equipment. On this date it was estimated that the item of plant equipment had a useful life of ten years and a residual value of $20,000. CRX Construction Ltd uses the revaluation model to measure items of property, plant and equipment and the straight-line method of depreciation. CRX Construction Ltd has a 30 June reporting date.
An independent valuer provided the following fair values for the item of plant equipment:
Reporting date Fair value
30 June 2020 $110,000
30 June 2021 116,000
30 June 2022 118,000
On 30 September 2022, the item of plant equipment was sold for $120,500 cash.
Prepare the journal entries to account for the events and transactions in relation to the item of plant equipment between 1 July 2019 and 30 September 2022.
2.On 1 July 2017, Blenheim Ltd purchased an item of machinery for $280,000. On this date it was estimated that the item of machinery had a useful life of seven years and zero residual value. Blenheim Ltd uses the cost model to measure items of property, plant and equipment and the straight-line method of depreciation. Blenheim Ltd has a 30 June reporting date.
In relation to the item of machinery, Blenheim Ltd has identified indicators of impairment for the reporting periods ending 30 June 2019 and 30 June 2020 and indicators for a reversal of impairment for the reporting period ending 30 June 2021. The fair value less costs of disposal and the value in use of the item of machinery on these dates were as follows:
Date Fair value less Value in use
costs of disposal
30 June 2019 $170,000 $180,000
30 June 2020 128,000 120,000
30 June 2021 125,000 130,000
- Prepare the journal entries to account for any impairment losses in relation to the item of machinery on 30 June 2019 and/or 30 June 2020.
- Explain and calculate the ceiling beyond which the carrying amount of the item of machinery cannot be increased on 30 June 2021 when reversing any previously recognised impairment losses. What is the purpose of the ceiling?
- Prepare the journal entry on 30 June 2021 to account for the reversal of any previously recognised impairment losses.
- Explain how the item of machinery would be accounted for on 30 June 2019 if Blenheim Ltd used the revaluation model to measure items of property, plant and equipment and, on this date, the fair value of the item of machinery was $174,000 and costs of disposal were $4,000.
3.On 1 July 2019, Norwich Ltd entered into a four-year lease agreement with Reliable Finance Ltd for an item of machinery. Norwich Ltd incurred initial direct costs of $2,747 to negotiate and arrange the lease. The lease agreement requires Norwich Ltd to make four annual lease payments of $30,000 per year paid at the beginning of each year (in advance: annuity due) on 1 July with the first payment on 1 July 2019.
At the end of the lease term, Norwich Ltd will return the item of machinery to Reliable Finance Ltd. The item of machinery will then be sold by Reliable Finance Ltd. The residual value of the item of machinery at the end of the lease term is determined by Reliable Finance Ltd to be $15,000 of which $8,000 has been guaranteed by Norwich Ltd. At the commencement of the lease, Norwich Ltd estimates that, at the end of the lease term, the item of machinery will realise $9,000 when it is sold.
The interest rate implicit in the lease is not determinable by Norwich Ltd. Norwich Ltd’s incremental borrowing rate is 4% per annum which reflects the fixed rate at which Norwich Ltd could borrow an amount similar to the value of the right-of-use asset, in the same currency, for a four-year term, and with similar collateral.
- Can Norwich Ltd elect to take advantage of the exemption in paragraph 5 of AASB 16 Leases from recognising a lease liability and right-of-use asset at the commencement of the lease? Justify your answer.
- Determine the amounts at which Norwich Ltd would recognise the right-of-use asset and the lease liability on 1 July 2019.
- Prepare the appropriate journal entries to account for the lease by Norwich Ltd between 1 July 2019 and 1 July 2020.
- Determine the amount of the lease receivable to be recognised by Reliable Finance Ltd on 1 July 2019. Assume that Reliable Finance Ltd can readily determine the interest rate implicit in the lease which is 7%.
- Explain why, on 1 July 2019, the amount of the lease receivable recognised by Reliable Finance Ltd is different from the amount of the lease liability recognised by Norwich Ltd.
- Assume that, on 30 June 2021, Norwich Ltd revises its estimate of the amount that the item of machinery is expected to realise when it is sold at the end of the lease term from $9,000 to $5,000. How would this revision affect (1) the lease liability and (2) the right-of-use asset?
4.Ryan Ltd commenced operations on 1 July 2019 and has one employee: Joe Hirsch. During the year ended 30 June 2021, Joe was paid $1,700 per week (an annual salary of $88,400). His only weekly deductions were $600 for PAYG tax instalments. Joe has an entitlement to four weeks’ annual leave each year and a 17.5% annual leave loading. The annual leave is accumulating and vesting. During the year ended 30 June 2021, Joe took one week of annual leave. The PAYG tax deducted for this week was $700.
Joe also has an entitlement to 10 days sick leave each year. The sick leave is non-accumulating and non-vesting. During the year ended 30 June 2021, Joe took three days’ sick leave.
Ryan Ltd provides Joe with 13 weeks of long-service leave (LSL) after 10 years of continuous service. The following information in relation to Joe is available for the year ended 30 June 2021:
Projected salary when long-service leave vests: $200,000
Years of service to date: 2 years
Probability that Joe remains for the vesting period: 15%
The corporate bond rate with a period to maturity of 8 years: 3%
The total long-service leave liability as at 30 June 2020: $484
(a)Provide the journal entries for Joe Hirsch that would be recorded each non-leave week during the year ended 30 June 2021.
(b)Provide the journal entries for the one week of annual leave taken by Joe Hirsch during the year ended 30 June 2021.
(c) Provide the journal entry for the three days’ sick leave taken by Joe Hirsch during the year ended 30 June 2021.
(d)Provide the journal entry for the year ended 30 June 2021 in relation to Joe Hirsch’s entitlement to long-service leave.