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The suspense account is made up of two items:
(a) The proceeds of issue of 4,000,000 50c shares at $1.10 per share, credited to the suspense
account from the cash book.
(b) The balance of the account is the proceeds of sale of some plant on 1 January 20X4 with a
carrying value at the date of sale of $700,000 and which had originally cost $1,400,000. No
other accounting entries have yet been made for the disposal apart from the cash book entry for
the receipt of the proceeds. Depreciation on plant has been charged at 25% (straight line basis)
in preparing the draft statement of financial position without allowing for the sale. The
depreciation for the year relating to the plant sold should be adjusted for in full.
Required
(a) Prepare the journal entries to clear the suspense account.( i managed to do A. i am struggling with B)
Two things are needed:
Firstly the sale entries need to be entered:
Dr Disposal account Cr Asset account with 1,400,000 (to remove the cost)
Dr Accum Depn Cr Disposal account with 700,000 (to remove the accum depn)
Dr Suspense account Cr Disposal account with whatever the remainder of the suspense account balance is (you have not given that).
The balance on the disposal account is the profit or loss on sale to the Statement of profit or loss.Secondly, the depreciation needs adjusting. It will have been charged at 25% on the cost of the asset that has been sold. So depreciation needs reducing by 25% x 1400000, and the profit will increase by the same amount.
If the question did only ask for the entries to clear the suspense account, then the only entry in relation to (b) is the one that affects the suspense account.
Dr Disposal account Cr Asset account with 1,400,000 (to remove the cost)
Dr Accum Depn Cr Disposal account with 700,000 (to remove the accum depn)after we remove the 700 000 on accum Depn , why we need to adjust the 1400 x 25% ?
like we adding back to retained earning .
Because we just removed the Accum Depn 700 000 . I just want to see the link removal 700 000 and adjustment on 1400 x 25%.
Thank for your help
tsholomimi has not typed the full question – the year end was 31 December.
So the correction for the sale itself is as I typed before.
However, depreciation for the year should not have been calculated on the asset that was sold – it should only have been on the assets remaining. Since it will have been calculated on the asset sold, this needs adjusting as well (but doesn’t affect the profit on disposal at all).
I understand now , as the depreciation was included full charge on the asset was sold.
so adjustment needed to correct the accumulated depreciation .
I done this question before and found difficult to understand what is actually the question was asked 🙁
Thank your help again
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