Question 2 (10 Marks) CLO 2

Case 1 (3 Marks) Property, Plant and Equipment Replacement part of an Asset

Majid Corporation of Dubai has acquired a machine with a useful life of 30 years and at a cost of $300,000. At the end of the 5^thyear of operation the motor of the machine requires replacement. The machine is still in good condition and is expected to continue operating for another 25 years. The cost of the new motor is $70,000.

Required:

a) Record the journal entry for the purchase of the motor.

b) Estimate the value of the original motor assuming a 5% increase of the price of motors over the 5- year period.

Answer:

Case 2 (3 Marks) Inventory

The Dubai Corporation has the following inventory items on hand at December 31, 2020:

	A	B
Historical cost	2,000	4,000
Replacement cost	1,600	3,200
Estimated selling price	1,720	2,480
Estimated costs to complete and sell	100	200
Normal profit margin 20%	324	456
Net realizable value less profit margin	1,296	1,824

Required:

Apply the lower of cost or net realizable value rule of accounting for inventory and determine the value of inventory of the Dubai Corporation at December 31, 2020.