Elisa Company Depreciates All of Its Fixed Assets on a Straight Line Basis

2003 AL

Elisa Company depreciates all of its fixed assets on a straight line basis. In the year of

acquisition, a full year’s depreciation is to be provided for assets purchased on or before

30 June and none for those purchased thereafter. Conversely, in the year of disposal, no

depreciation is to be provided for assets sold on or before 30 June but a full year’s

depreciation is to be provided for those sold thereafter. The following four types of fixed assets were held by Elisa Company at the end 31 December 2002 and their depreciation for the year 2002 had not yet been provided for:

(1) Motor cars

On 10 December 2002, Elisa Company purchased a second-hand car for $30 000,

including petroleum costing $1000. To finance the purchase of the car, interest totaling

$2000 was incurred. During the price negotiation, the company already knew that the car

required extensive engine repair. The repair work was done in the week following the

purchase and the company incurred a cost of $5500. In addition, a spare tyre costing

$2000 was purchased.

(2) Office buildings

Elisa Company owned a building which was used as its office premises for many years.

On 1 January 2002, the building had a net book value of $25 000 000 and the valuation

made by a professional valuer at $30 000 000 was to be incorporated into the books. The

remaining useful life was estimated to be 15 years. In November 2002, half of the

property was sold at $15 800 000.

(3) Machinery

Elisa Company purchased two identical machines in February 2002 for $100 000 each.

Machine A was used in production while Machine B was kept in the warehouse as the

backup. Machine A has an estimated useful life of 5 years. The company did not estimate

the useful life of Machine B because there was no physical deterioration yet.

(4) Office equipment

Part of the equipment costing $2 000 000 had been fully depreciated at the end of 1999

and was sold for $600 000 in January 2000. The sale had been recorded in the respective

office equipment and accumulated depreciation accounts but the sale proceeds were

recognized as income in year 2000. Consequently, depreciation was still being provided

on the cost of the equipment at 10% per annum in the past two years. Elisa Company

reported a net loss of $85 000 and $135 000 for the two years ended 31 December 2000

and 31 December 2001 respectively. As at 1 January 2002, Elisa Company had office

equipment costing $8 000 000(accumulated depreciation $5 000 000).

You are required to:

(a) List the correct net values of the four types of fixed assets held by Elisa Company as at 31 December 2002. (4)

(b) Explain, with reasons, the relevant accounting treatments that should be adopted by Elisa Company as at 31 December 2002 with respect to each of four types of fixed assets. (16)

2005 AL (P.2 – No.2)

Yellow Stone Manufacturing Ltd commenced business in 2004 producing cleaning liquid Product X. Each bottle of Product X contains 1 litre of raw materials.

The production budget for the year ended 31 December 2004 on the basis of 100 000 bottles is shown below:

$
Raw materials ($10 per litre) / 1 000 000
Direct labour ($2 per labour hour) / 800 000
Factory overheads - fixed / 200 000

Other budget information:

Selling and distribution expenses
Fixed
Variable
Administrative expenses – fixed
Selling price
Sales volume / $150 000
$1 per bottle
$400 000
$30 per bottle
90 000 bottles

Required:

(a) (i) Prepare the budgeted income statement for Product X based on absorption

costing to show the budgeted net profit for the year ended 31 December 2004.

(5 marks)

(ii) How will the budgeted net profit differ if marginal costing is used instead?

(2 marks)

The actual results of Product X for the year ended 31 December 2004 are shown below:

$ / $
Sales (120 000 bottles produced and sold) / 3 540 000
Raw materials ($9.95 per litre) / 1 228 825
Direct labour ($2.10 per labour hour) / 1 010 100
Factory overheads / 205 000
Selling and distribution expenses
Fixed / 152 000
Variable / 120 000
Administrative expenses / 420 275 / 3 136 200
Net profit / 403 800

Jimmy Chow, the director, said to Robert Wong, the cost accountant, ‘I am delighted to find that the actual net profit is better than that in the original budget.

Furthermore, the variable selling and distribution expenses per bottle match exactly with budgeted amount!’ However, Robert Wong did not agree with Jimmy Chow, ‘We should not evaluate the performance based on the original budget.’

Required:

(b) Explain Robert Wong’s view on the 2004 performance of Product X.

Support your answer with a list of discrepancies between the actual and budgeted

amounts. (9 marks)

following items: (i) Sales

(ii) Raw materials cost

(iii) Direct labour cost (6 marks)

During the year 2004, $240 000 was incurred for the development of a new Product Y. the variable production costs for each bottle of Product Y are:

Raw materials / $11
Direct labour / $24

The experience in 2004 shows that the company has spare capacity to deal with additional

production. If the company maintains the production level of Product X at 120 000 bottles

in 2005, it will be able to produce and sell 50 000 bottles of Product Y, and the following

additional expenses are required for 2005:

Selling and distribution expenses
Fixed
Variable
Administrative / $70 000
$2 per bottle Product Y
$80 000

An engineer would be redeployed from another unit to supervise the production of Product Y, if any, in 2005. he would be paid at the current salary of $150 000 per annum and would return to his original post when Product Y ceases production. Product Y can be sold at $44 per bottle. However, Product Y will be sold for one year only because another new product will be launch in 2006. The whole amount of the development cost will be written off in 2005.

Required:

advise with supporting calculations whether the company should product Product Y

in 2005. (8 marks)