MODULES 6 & 7

Additional Examples

I. PPE
a. What are the necessary correcting entries for each transaction?

Account Debit Credit

Buildings 225,000.00
Land 75,000.00
Equipment 150,000.00

Interest payable 30,000.00

Factory Equipment 30,000.00

Purchase Discount 16,000.00

Store Equipment 16,000.00

Profit on Construction 2,000,000.00

Buildings 2,000,000.00

XYZ acquired the following items of PPE:

1. Land, buildings and equipment from a financially distressed

corporation, ABC Inc., for a lump sum price of 2,800,000.00. On
acquisition date, ABC Inc.’s assets had the following book and fair
values:

Book Value Fair Value

Land 800,000.00 600,000.00
Buildings 1,000,000.00 1,400,000.00
Equipment 1,200,000.00 1,200,000.00

XYZ decided to take a conservative approach by recording the lower

of the two values for each item of PPE. Thus, the following entry was
made:

Account Debit Credit

Land 600,000.00
Buildings 1,000,000.00

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 Equipment 1,200,000.00
Cash 2,800,000.00

2. Factory equipment, by making a 200,000.00 cash down payment

and signing a 10% 3-year 300,000.00 note payable. This was
recorded as follows:

Account Debit Credit

Factory Equipment 530,000.00
Cash 200,000.00
Note Payable 300,000.00
Interest payable 30,000.00

3. Purchased store equipment for 800,000.00, 2/10 n/30. It took the

discount, and made the following entry upon payment:

Account Debit Credit

Store Equipment 800,000.00
Cash 784,000.00
Purchase Discount 16,000.00

4. Constructed a building at a total cost of 43,000,000.00. The building

could have been purchased for 45,000,000.00. The controller made
the following entry to reflect the transaction:

Account Debit Credit

Building 45,000,000.00
Cash 43,000,000.00
Profit on Construction 2,000,000.00

b. What amount of gain (loss) should be recognized on the sale of the

second replaced machine on 01 March of the current year? 772.50;
What amount of gain (loss) should be recognized on the machine sold
for scrap on 01July of the current year? (240.00); What amount of
depreciation should be provided in the current year on the machine
whose motor was replaced on 01 July of the current year? 1,905.90;
What amount of depreciation should be provided in the current year on
the machine arm installed on 01 October of the current year? 60.00 --

XYZ uses a large number of machines in its production process. These

machines are generally depreciated at 10% per annum on a straight line

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 basis. In general, the machines are estimated to have a residual value
of 10% of cost. At the start of the current year, XYZ had a total of 73
machines and its statement of financial position showed a total cost of
1,260,000.00 and accumulated depreciation of 390,000.00.

The following occurred during the current year (2022):

1. On 01 March, a new machine was acquired for 45,000.00. This single

machine was acquired to replace two old machines. One of the
machines replaced was acquired on 01 January 2019 for 24,600.00.
It was traded in for the new machine together with a cash payment
of 26,400.00. The other machine which was replaced was acquired
on 01 October 2019 at a cost of 27,000.00. This was sold for scrap
for 21,900.00.

2. On 01 July, a machine that was bought on 01 January 2013 at a cost

of 12,000.00, was retired from use and sold for scrap for 1,500.00.

3. On 01 July, a machine acquired 01 July 2019 for 21,000.00 needed

a replacement motor because its current motor had been damaged
from overheating. The motor was replaced at a cost of 14,400.00. It
was expected that this would extend the life of the machine by an
extra 2 years.

4. On 01 October, XYZ fitted a new arm to a machine to be used to

engrave special markings on the products. The new arm costs
3,600.00. The machine on which the new arm was fitted had been
acquired on 01 October 2019 for 30,000.00. The arm can be used
on a number of other machines when acquired and has a 15 year-
life. It will not be sold when any particular machine is retired, but can
be retained for use on the other remaining machines.

II. Cashflows
a. What is the total amount of cash received from customers during the
year? 21,780,000; What is the total amount of cash paid to suppliers
during the year? 14,025,000; What is the total amount of cash paid for
operating expenses during the year? 4,080,000; What is the net amount
of cash provided by operating activities? 3,675,000 –

The income statement of XYZ is presented below:

Sales 20,700,000

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Cost of Goods Sold:
Inventory, 01 Jan 5,700,000
Purchases 13,200,000
TGAS 18,900,000
Inventory, 31 Dec 4,800,000 14,100,000
Gross Income 6,600,000
Operating Expenses:
Selling Expenses 1,350,000
Admin. Expenses 2,100,000 3,450,000
Net Income 3,150,000

Additional Information:

1. Accounts receivable decreased 1,080,000 during the year.

2. Prepaid expenses increase 510,000 during the year.

3. Accounts payable to suppliers of merchandise deceased 825,000.

4. Accrued expenses payable decreased 300,000 during the year

5. Administrative expenses include depreciation expense of 180,000.

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