Acct 7102

Suggested solutions to the sample mid-semester exam paper

Question 1

(a) PVMLP

When discount rate=12%, PVMLP = FV. Calculations provided below.         

Periodic lease payments: 315 000 x 3.6048 =         1 135 512

Bargain purchase option: 280 000 x 0.5674 =        + 158 872

Fair value at lease inception                                   = 1 294 384

Note: We eliminate the executory costs from the lease payment.

As the amount of the minimum lease payments discounted at 12% equates to the fair value of the asset at lease inception, the interest rate implicit in the lease is 12%.

(b) 

1 July 2012

Dr Leased asset                 1 294 384

Cr         Lease liability                         1 294 384

30 June 2013

Dr Interest expense                 155 326

Dr Lease liability                     159 674

Dr Executory costs                  35 000

Cr         Cash                                         350 000

(155 326 = 1 294 384 x 0.12)

Dr Depreciation expense         180 731

Cr         Accumulated depreciation  180 731

$180 731 = (1 294 384 – 210 000)/6

Assume ownership will pass due to bargain purchase option, therefore depreciate over the economic life of the asset, not the lease term. Also, note that only a salvage value is taken into account when calculating the depreciation charge. Guaranteed residual values (and bargain purchase options) are ignored because there is uncertainty about whether they are an accurate reflection of the salvage value of the leased asset.

(c)

30 June 2013

Dr Executory expenses          35 000

Dr Lease expense                 315 000

Cr Cash                                       350 000

To record lease payment for 2013

30 June 2014

Dr Executory expenses         35 000

Dr Lease expense                 315 000

Cr Cash                                 350 000

To record lease payment for 2014

Question 2

PART A

1 July 2012

Machinery (at cost of acquisition)  1,200,000

Cash at bank                1,200,000

30 June 2013

Depreciation expense      200,000    ($1,200,000/6 years)

Accumulated depreciation     200,000

No fair value as at 30 June 2001 given – indicates that a revaluation is not required.

30 June 2014

Depreciation expense   200,000   ($1,200,000/6 years)

Accumulated depreciation   200,000

Carrying amount $800,000 > $640,000 fair value. Asset is not impaired since value in use is

$810,000

Accumulated depreciation   400,000 ($200,000 x 2 years)

Machinery               400,000

Write back accumulated depreciation – net method

30 June 2014

Revaluation expense 160,000 ($640,000 - $800,000)

Machinery       160,000

.

PART B

1 July 2012

Machinery (at cost of acquisition) 1,200,000

Cash at bank                  1,200,000

30 June 2013

Depreciation expense        200,000 ($1,200,000/6 years)

Accumulated depreciation        200,000

30 June 2014

Depreciation expense        200,000 ($1,200,000/6 years)

Accumulated depreciation        200,000

Carrying amount ($1,200,000 - $400,000) > $640,000 value in use

Impairment loss    160,000 ($640,000 - $800,000)

Accumulated impairment loss   160,000

30 June 2015

Depreciation expense   160,000 ($640,000/4 years)

Accumulated depreciation    160,000

Carrying amount ($640,000 - $160,000) > $480,000

Assume that indicators of impairment reversal exist at 30 June 2015

Recoverable amount (given)                 $610,000 > ceiling

Ceiling: Cost $1,200,000 – ($200,000 x 3 years) $600,000

Less Carrying amount                      $480,000

Maximum reversal                         $120,000

Accumulated impairment loss   120,000

Reversal of Impairment loss      120,000

Note accounting depreciation 30 June 2016 will be $600,000/3years