Reference no: EM132734189
Question -
(a) Top Technology Company (TTC) acquired a new equipment on 1 January 2016. Expenditure incurred for this new machine included the following:
1. Purchase cost of the equipment being $5,000,000
2. Administration and other general overhead costs for appraising and reviewing investment in the new equipment amounting to $25,000
3. Initial delivery cost of $60,000
4. Labor costs of $150,000 for fixing interior of the factory to accommodate the new. equipment
5. Installation and assembly costs for the equipment being $75,000
6. Cost of initial testing of $40,000
7. Costs of introducing new products manufactured by this new equipment of. $950,000
Required: Determine the acquisition cost of the new equipment.
(b) Continuing from (a) and assume that the acquisition cost of the new equipment was determined as $6,000,000. TTC used the cost method and straight-line depreciation to account for its equipment. The equipment was estimated to have 20 years of useful life and zero residual value.
On 31 December 2017, TTC performed an impairment review on the equipment. At the same time, the company received an offer of $5,400,000 for the equipment from Sonic Sound Company (SSC). If TTC was to sell the equipment, it would have to incur $600,000 to remodel the equipment to fit for the use by SSC. The present value of estimated cash flows from continued use of the equipment was estimated as $5,000,000.
On 31 December 2018, TTC performed an impairment review on the equipment, and determined that the recoverable amount of the equipment was $5,200,000.
The estimated life and residual value of the equipment remained unchanged after impairment.
Required: Record all journal entries relating to the equipment in years 2016 to 2018. Show all your workings.
(c) Continuing from (b) and using the same depreciation policy, assume now that the carrying amount of the equipment after impairment as at 31 December 2018 was $5,100,000.
On 31 December 2019, the directors of TTC had the opportunity and decided to change the basis of measuring the equipment from cost method to the revaluation method. The equipment was valued at $5,200,000.
On 31 December 2020, immediately after the equipment was remodeled at a cost of $600,000, the machine was sold to SSC for $5,400,000.
Required: Record all journal entries relating to the equipment in years 2019 and 2020. Show all your workings.