During the 2017 financial year, Triple 1 Cold Drink Bottlers identified that the demand for their product increased substantially. It was decided to purchase an additional bottling machine to increase the number of bottles produced. On 1 May 2017 Triple 1 Cold Drink Bottlers purchased the bottling machine, and the invoice received from the supplier reflected the following: R Listed Price 2, 000, 000 VAT at 15% 300, 000 Total 2, 300, 000 The supplier offered Triple 1 Cold Drink Bottlers a settlement discount of 10% if payment was made within 60 days. The amount was settled on 15 June 2017. In addition to the initial purchase costs, Triple 1 Cold Drink Bottlers paid R40, 250 (VAT inclusive) in respect of delivery costs, and R15, 000 (VAT exclusive) to a professional engineer in respect of installation costs on 10 May 2017. 

During the installation of the bottling machine, one of Triple 1 Cold Drink Bottlers’ employees damaged the bottling machine, and an additional amount of R19 665 (VAT inclusive) was incurred for repairs on credit by the business. Before making the bottling machine available for use, it was decided to test the bottling machine to determine if it is working as designed. The test was held on 10 May 2017 and 200 bottles were produced at a total cost of R15 000 (excluding VAT). These costs were incurred on credit. It was decided by the management to recoup some of the testing costs by selling all 200 test bottles at a discount for cash at R10 per bottle excluding VAT. It is the accounting policy of Triple 1 Cold Drink Bottlers to provide for depreciation on bottling machinery based on the units of production method. The bottling machine was made available for use on 1 June 2017 and the following information relates to the production capacity and utilization of the equipment as of that date: Year Note Total Capacity Bottles produced 2017 100, 000 30, 000 1/01/2018 – 30/06/2018 1 100, 000 20, 000 1/07/2018 – 31/12/2018 150, 000 50, 000 Note 1 :On 30 June 2018 Triple 1 Cold Drink Bottlers increased the production capacity of this bottling machine from 100, 000 bottles to 150, 000. The cost of R285, 000 (excluding VAT) incurred to increase the production capacity was paid on the same day. While preparing the financial statements for the year ended 31 December 2018, management was of the opinion that the bottling machine might be impaired. The fair value of this equipment on 31 December 2018, as determined by an independent actuary, amounted to Page 7 of 7 R700, 000 (excluding VAT). The costs of dismantling and removing the equipment were estimated at R50, 000 (excluding VAT). The future cash flows associated with the plant for the next three years are as follows: Year Cash Flow Discounted Cash Flow 2019 R500, 000 R450, 000 2020 R200, 000 R150, 000 2021 R150, 000 R120, 000 You are required to: 

1. Calculate the initial cost of the bottling machine purchased on 1 May 2017. 

2. Prepare all relevant journal entries for the purchase of the bottling machine.

3. Prepare all the relevant Journal entries relating to the year ended 31 December 2018, before taking the potential impairment into account.

4. Calculate the value of impairment that should be recognized as of the year ended 31 December 2018.

Answer rating: 100% (QA)

1 To compute the underlying expense of the packaging machine bought on 1 May 2017 we want to consider the recorded value Tank settlement markdown conv... View the full answer