Refer to the following insert and answer the questions Georgie Zamdela owns Horizon Deep (Pty) Ltd, a
Question:
Refer to the following insert and answer the questions Georgie Zamdela owns Horizon Deep (Pty) Ltd, a construction company in KwaZulu-Natal. The business has a year-end of 31 March. On 17 March 2015, Georgie ordered a hand-held digging machine from a supplier in Bloemfontein. The machine was intended to be used in the construction of roads. The sales contract stipulated that the machine would be sent FOB shipping point 15 days after the order date and that the business will pay the supplier R517 500 on 31 March 2016. This is longer than usual credit terms. Assume a related market interest rate of 15% p.a.
Following the arrival of the machine at Horizon Deep’s business premises, the machine had to pass a safety test before it would be ready for use. The test was completed on 1 May 2015 at a total cost of R18 000. This amount was paid via internet transfer on the date of the test.
The company uses the diminishing balance method to calculate depreciation on digging machines. The machine has a residual value of R153 354, and is depreciated at a rate of 20% per annum.
Ignore VAT
Round off all figures to the nearest rand
1. Explain WHY the machine ordered on 17 March 2015 is considered an item of Property, Plant and Equipment (PPE) of the business. You are expected to describe what PPE is, and apply your description to the question, but you are NOT required to provide the asset definition and recognition criteria as outlined by the Conceptual Framework. 3.1.
2. Prepare the general journal entry that would have been processed by Digger-Dig-Dig (Pty) Ltd to record the purchase of the machine. Show dates. Ignore narrations.
3. Prepare any general journal entry/ies that should be processed by Digger-Dig-Dig (Pty) Ltd on 31 March 2016. If NO general journal entry/ies should be processed, explain why. Ignore narrations.
4. Show how the machine would be disclosed in the statement of financial position on 31 March 2017.
Expert Answer:
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