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    Ahmed Raza
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    1. Usman Limited acquired a machine for Rs. 600,000 plus installation of Rs. 60,000 and dismantling costs of Rs. 50,500 to be paid in 4 years. Journal entries are made each year for depreciation of Rs. 175,000 and increase in dismantling provision. In the 4th year, dismantling of Rs. 50,500 is paid. 2. To calculate value in use of an asset, net cash flows for 4 years are projected considering given information, then discounted at 10% to get present values which are summed to get value in use of Rs. 1,144,928. Cash flows increase by 6% in year 2, remain same in year 3 and

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    1. Usman Limited acquired a machine for Rs. 600,000 plus installation of Rs. 60,000 and dismantling costs of Rs. 50,500 to be paid in 4 years. Journal entries are made each year for depreciation of Rs. 175,000 and increase in dismantling provision. In the 4th year, dismantling of Rs. 50,500 is paid. 2. To calculate value in use of an asset, net cash flows for 4 years are projected considering given information, then discounted at 10% to get present values which are summed to get value in use of Rs. 1,144,928. Cash flows increase by 6% in year 2, remain same in year 3 and

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    9 views3 pages

    8th Homework FAR 1

    Uploaded by

    Ahmed Raza
    1. Usman Limited acquired a machine for Rs. 600,000 plus installation of Rs. 60,000 and dismantling costs of Rs. 50,500 to be paid in 4 years. Journal entries are made each year for depreciation of Rs. 175,000 and increase in dismantling provision. In the 4th year, dismantling of Rs. 50,500 is paid. 2. To calculate value in use of an asset, net cash flows for 4 years are projected considering given information, then discounted at 10% to get present values which are summed to get value in use of Rs. 1,144,928. Cash flows increase by 6% in year 2, remain same in year 3 and

    Copyright:

    © All Rights Reserved
    Download as PDF, TXT or read online from Scribd
    Flag for inappropriate content
    Download as pdf or txt
    of 3

    Question 1

    Usman Limited acquired a machine on 1 Jan 2016. Details of the costs are
    as under:
    ----Rs----
    Purchase price 600,000
    Installation Cost 60,000
    Dismantling Cost 50,500

    Dismantling Cost shall be paid in 4 years (end of useful life)


    Discount rate appliable to the company is 6%.

    Required
    Journal Entries for the year ended 31 December 2016,2017,2018 and 2019

    Question 2

    From the following information about the next year (2021), calculate value in use for
    an asset:
    31 Dec 2021
    Sales 650,000
    Cost of Production 260,000
    Selling Cost 25,000
    Collection from past receivables 12,500
    Payment against past payables 7,800
    Proposed upgradation cost 350,000
    Additional inflows due to overhauling 125,000
    Maintenance Cost 32,000
    Interest on finance for operations 34,500
    Tax charges 16,500

    Relevant cash flows will increase by 6% in 2022, 0% in 2023 and will reduce
    by 10% in 2024. Useful life of the asset us 4 years and thereafter the asset
    shall be disposed at Rs 100,000. Applicable discount rate shall be 10%

    Required
    Calculate value in use for the asset.
    Solution 1

    Cost of the asset

    Purchase price 600,000


    Installation Cost 60,000
    PV of dismantling Cost 40,000
    Gross Cost 700,000
    Annual Depreciation 175,000

    Schedule for Dismantling Cost

    Yr Opening Increase Closing


    2016 40,000 2,400 42,400
    2017 42,400 2,544 44,944
    2018 44,944 2,697 47,640
    2019 47,640 2,859 50,500

    Journal Entries

    1 Jan 2016
    Property, plant and Equip 700,000
    Cash 660,000
    Provision for DC 40,000

    31 Dec 2016
    Depreciation Expense 175,000
    Allowance for Depre 175,000

    31 Dec 2016
    Interest Expense 2,400
    Provision for DC 2,400

    31 Dec 2017
    Depreciation Expense 175,000
    Allowance for Depre 175,000

    31 Dec 2017
    Interest Expense 2,544
    Provision for DC 2,544

    31 Dec 2018
    Depreciation Expense 175,000
    Allowance for Depre 175,000

    31 Dec 2018
    Interest Expense 2,697
    Provision for DC 2,697

    31 Dec 2019
    Depreciation Expense 175,000
    Allowance for Depre 175,000

    31 Dec 2019
    Interest Expense 2,859
    Provision for DC 2,859

    31 Dec 2019
    Provision for DC 50,500
    Cash 50,500

    Solution 2
    -----------------31 December--------------
    2021 2022 2023 2024
    Sales 650,000
    Cost of Production (260,000)
    Selling Cost (25,000)
    Maintenance Cost (32,000)
    Residual Value 100,000
    Net Cash 333,000 352,980 352,980 417,682
    6% increase 0% increase (352,980x90%+100,000)

    PV at 10% 302,727 291,719 265,199 285,282


    Value in Use 1,144,928

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