Acquisition of Non-Current Assets and Entities

Only available on StudyMode
  • Topic: Balance sheet, Market value, Fair value
  • Pages : 7 (1905 words )
  • Download(s) : 667
  • Published : October 18, 2011
Open Document
Text Preview
A CC T1 0 0 6

CASE STUDY: TOPIC 4 - SOLUTION

FINANCIAL ACCOUNTING 1

COURSE COORDINATORS: CHEE FEI CHANG PREPARED BY: SCOTT COPELAND

FA 1 – PHUONG CASE STUDY: TOPIC 4 SOLUTION

CASE STUDY 4 – ACQUISITION OF NON-CURRENT ASSETS AND ENTITIES

At the end of his adventures in ADA Phuong had decided to purchase a new Standard Diesel Delivery Van. Phuong conservatively estimates the delivery van should provide him benefits for at least the next 5 years at which time he should be able to receive a trade in of $2,000 on an upgraded van. As noted in topic 1 the delivery van was purchased on June 25. The relevant entry Phuong made was June 25 Delivery Van GST Outlays Cash 22,000 2,200 24,200

Following your discussion on Topic 2 and the importance of following accounting standards Phuong has reviewed the purchase he made and the way he recorded it. At the time of buying the van Phuong spent an additional $8,800 (including GST) on accessories and incidental items related to the van on the recommendation of the dealer. To account for these Phuong had made a second entry as follows June 25 Van Purchase Expenses GST Outlays Cash 8,000 800 8,800

The additional expenditure can be broken down as follows (all items listed are net of GST)  Complete wash and detailing of the vehicle including the application of pinstriping in Phuong’s company colours. $300  Stamp Duty and Government Taxes. $600  A set of upgraded light truck tyres that are designed to last twice as long as the factory supplied tyres. $480  A refrigeration and heating unit which allows Phuong to deliver his catering food at the appropriate temperature. $4000  Roadside Assistance Package. $520 (Guarantees a mechanic will be available24 hours a day, 7 days a week to repair any mechanical faults for the next 24 months)  GPS Navigation Unit that allow Phuong to locate his next delivery point more efficiently. $1200  An upgraded suspension package to allow the van to deal with extra weight of the refrigeration and heating unit. $900

2

FA 1 – PHUONG CASE STUDY: TOPIC 4 SOLUTION

Required 1. Prepare the General Journal entry to correctly record the purchase of the Delivery Van and the associated costs. 2. Comment on the impact of recording the purchase as Phuong originally did in comparison to the method required by the standards. Phuong has been quite happy with progress of the sales of his The Hot Stuff sauce and is thinking about expanding his operations. Phuong has had some discussions with people he knows in the retail industry and it seems there are potential gains to be made from producing the sauce himself and expanding his range. In order to achieve this Phuong has come up with two options. The first is to find some sort of financing that will let him buy the different assets he needs and hire extra staff to produce and bottle the range of sauces. Phuong has managed to identify a company that has repossessed a variety of assets from failed business and is therefore offering them at a reasonably good price. Of those assets available Phuong is hoping to acquire a Sauce Extraction Unit that is capable of turning fresh produce into a form useable in his sauces, a bottle sterilisation and filling plant, an inventory of glass bottles that were designed for soft drinks but are a suitable size for his sauces and a small warehouse and land package in a recently developed industrial area. Phuong organised for an independent valuation of the items he is interested in and the report has determined the fair values for each item are: Sauce Unit - $17,000, Bottle Plant - $23,000, Inventory - $6,000 net realisable value and Warehouse and Land - $60,000. Following some intense negotiation with the company representative Phuong has agreed to pay $94,400 for the assets. Phuong will need to borrow the full amount in order to make this purchase. Required 3. Prepare the General Journal entry to record the purchase of this group of assets. Make sure you show all...
tracking img