A complex piece of equipment for a car plant was purchased, checked and put into operation. The following data are provided: • Invoice amount owed to supplier 119,000 lei. (VAT of 19% included) • Transportation cost to the plant location 11,900 lei. (VAT of 19% included) • Checking procedures in

Question

A complex piece of equipment for a car plant was purchased, checked and put into operation. The following data are provided:
• Invoice amount owed to supplier 119,000 lei. (VAT of 19% included)
• Transportation cost to the plant location 11,900 lei. (VAT of 19% included)
• Checking procedures in the amount of 10,000 lei. (no VAT involved)
• Accounting policy settled: 10 years, double-decline method, immaterial residual value
• By the end of the year 4 the equipment is revaluated at 52,000 lei.
Requirements: provide the impact of the acquisition, annual depreciation and revaluation of the equipment advantages and disadvantages of NCA revaluation on the financial statements.

Accepted Answer

Step 1. Computation of the initial cost of the equipment

Net acquisition invoice amount………………………….. 100,000 lei (without VAT)
Net transportation cost from invoice …………………… 10,000 lei (without VAT)
Checking procedures……………………………………… 10,000 lei
Total initial cost (depreciable cost)……………………….120,000 lei.

Step 2. Depreciation, based on a 10 years useful life, double decline method

Useful life (0)	Carrying amount (1)	Depreciation expense (2 = 1 * 20%)	Accumulated depreciation (3)	Carrying amount (4 = 1 − 2)
Year 1	120,000 lei	24,000 lei	24,000 lei	96,000 lei
Year 2	96,000 lei	19,200 lei	43,200 lei	76,800 lei
Year 3	76,800 lei	15,360 lei	58,560 lei	61,440 lei
Year 4	61,440 lei	12,288 lei	70,848 lei	49,152 lei
….......

Step 3. Revaluation of the equipment by the end of the 4th year

Carrying amount of equipment end year 4………………49,152 lei
Market value of the equipment end year 4………………52,000 lei
Revaluation reserve (revaluation difference)…………………2848 lei

Step 4. Effects on the financial statement

a) Acquisition of equipment:

Acquisition invoice:

Method 1

a) ASSETS = EQUITY + LIABILITES

+100,000 lei = 0 + 119,000 lei

+19,000 lei

↓ ↓

119,000 lei % = Accounts payable for non-current assets 199,000 lei

1000,000 lei equipment

19,000 lei VAT deductible

The impact is on the Balance Sheet of the company , assets increase by 100,000 lei, VAT increase by 19,000 lei, liabilities increase by 119,000 lei.

Transportation invoice

Journal entry

119,000 lei % = Accounts payable for non-current assets 199,000 lei

1000,000 lei equipment

19,000 lei VAT deductible

The impact is on the Balance Sheet of the company , assets increase by 100,000 lei, VAT increase by 19,000 lei, liabilities increase by 119,000 lei.

Checking procedures:

Journal entry

ASSETS = EQUITY + LIABILITES

+100,000 lei = 0 + 10,000 lei

↓ ↓

10,000 lei Equipment = Accounts payable 10,000 lei

The impact is on the Balance Sheet of the company , assets increase by 10,000 lei, and liabilities increase by 10,000 lei.

b)Annual depreciation[latex]^{a}[/latex]

Journal entry

24,000 lei "Expenses with equip. depreciation" = "Accumulated depreciation of equip" 24,000 lei

↓ ↓

Effect in the Income Statement Effect in the balance sheet

(Expense +) (Equipment value -)

There is a singnificant impact om the Income Statement , because the Depreciation expense of 24,000 lei decreases the Profit and, in the end, the Equity. The other impact is on the Balance Sheet of the company: the equipment value declines by 24,000 lei and amounts to 96,000 lei by the end of the first year of use; additionally the equity is diminished by the same amount, 24,000 lei

[latex]^{a}[/latex] The transaction related to the annual depreciation is repeated each year with a different amount, based on the annual depreciation computation (see depreciation table).
c) Method 1. Revaluation of the equipment by the end of the 4th year—using the revaluation of the net book value method

Journal entry

a) Step 1.Cancelling the accumulated depreciation

ASSETS = EQUITY + LIABILITES

+70,848 lei

-70,848 lei

70,848 lei "Accumulated depreciation" = " Equipment" 70,848 lei

b) Step 2. Recognising the revaluation difference

ASSETS = EQUITY + LIABILITES

+2848 lei = +2848 lei + 0

2848 lei " Equipment" = "Revaluation reserve" 2848 lei

The impact is seen in the Balance Sheet at the assets level: the equipment value is initially decreased to its net book value and then increased by 2848 lei , the accumulated depreciation decreases to 0 lei and at the equity level, revaluation reserves are increased by 2848 lei

Method 2. Revaluation of the equipment by the end of the 4th year—using the revaluation of the initial cost and the accumulated depreciation

Journal entry

This revaluation method is based on determining a revaluation coefficient as follows:

Revaluation coefficient = Fair value/carrying amount =52,000/49,152=1.058

The revaluation coefficient is then applied to both the initial cost of the equipment accumulated depreciation, as shown in the following table:

Elements	Initial values	Revalued amounts	Differences	Impact
Equipment	120,000 lei	120,000 × 1.058 = 126,960 lei	126,960 - 120,000=6960 lei	Increase of equipment with 6960 lei
Accumulated depreciation of equipment	70,848 lei	70,848 × 1.058 =74,957 lei	74,957 - 70,848 = 4109 lei	Increase of accumulated depreciation with 4109 lei
Revaluation reserve	0 lei	0 lei	6960 - 4109 =2851 lei	Increase of the revaluation reserve with 2851 lei

ASSETS = EQUITY + LIABILITES

+6960

-4109 lei = +2851 lei

6960 lei "Equipment" = % 6960 lei

"Accumulated depreciation of equipment" 4109 lei

"Revaluation reserve" 2851 lei

The impact is seen in the Balance Sheet at the assets level and consists of the equipment value, which is increased by 6960 lei , and the depreciation of equipment, which is increased by 4109 lei , and at the equity level, where revaluation reserves are increased by 2851 lei.

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