Reference no: EM132976105

Question - Satellite Manufacturing is a company involved in the manufacture of high-tech components for various types of computer-controlled equipment. Recently, the company was required to replace an expensive item of manufacturing equipment. Details were as follows:

Purchase price of new equipment $1,980,000 net of GST Trade discount received 10%

Settlement discount offered 5/30, n/90

Installation and testing $145,000 net of GST

The equipment was purchased on 12th June 2010, was installed and ready for use by 30th June 2010, and was paid for on 8th July 2010.

Management of Satellite Manufacturing expects the equipment to be used consistently throughout its life, but estimates the life may be only 10 years, which is shorter than the manufacturer's estimate of 15 years. Due to the specialized nature of the equipment, it is unlikely to have a residual value.

Required -

(a) Explain how the purchase price, installation and testing, the trade discount and settlement discount would be accounted for in the books of Satellite Manufacturing. Justify your answer with reference to relevant accounting standards where applicable.

(b) Assume the asset was recorded in the accounts at $1,927,000 at its acquisition. Provide the general journal entry for depreciation for the first year of use, and justify the method you have used.

(c) After five years of use, the equipment required modifications to the value of $420,000 net of GST. These modifications would extend the useful life of the equipment by three years, and enable it to manufacture a new component. Explain briefly how these modifications would be recorded.

(d) Show how the equipment would appear in the balance sheet immediately after the modifications, assuming these modifications are capitalised (carried forward as an asset).