Question 1

Wastewater Ltd acquired an item of plant on 1 July 2016 for $3 660 000. When the item of plant was acquired, it was initially assessed as having a life of 10000 hours. During the reporting period ending 30 June 2017 the plant was operated for 3000 hours.

At 1 July 2017 the plant had a remaining useful life of 7000 hours. On 1 July 2017 the plant underwent a major upgrade costing $234 600. Management believes that this upgrade will add a further 2000 hours of operating time to the plant’s life. During the reporting period ended 30 June 2018 the plant was operated for 4000 hours.

On 1 July 2018 the plant underwent a further major upgrade, the cost of which amounted to $344 900, and this added a further 3100 hours’ operating time to its life. During the reporting period ending 30 June 2019 the plant was operated for 3800 hours.



Prepare all the journal entries that Wastewater Ltd would prepare for the years ending 30 June 2017, 30 June 2018 and 30 June 2019 to account for the acquisition, subsequent expenditure and depreciation on the asset.


Question 2

Energy Ltd is involved in the research and development of a new type of three-finned surfboard. For this R & D it has incurred the following expenditure:

  • $50 000 obtaining a general understanding of water-flow dynamics
  • $30 000 on understanding what local surfers expect from a surfboard
  • $90000 on testing and refining a certain type of fin
  • $190 000 on developing and testing a full prototype of the three-finned board, to be called the ‘thruster’.

There is expected to be a very large market for the product, which will generate many millions of dollars in revenue.


Determine how the above expenditure would be treated for accounting purposes


Question 3

Hopeful Ltd leased a portable sound recording studio from Lessor Ltd. Lessor has no material initial direct costs.

Hopeful Ltd does not plan to acquire the portable studio at the end of the lease because it expects that, by then, it will need a larger studio. The terms of the lease are as follows:

  • Date of entering lease: 1 July 2019.
  • Duration of lease: four years.
  • Life of leased asset: five years.
  • Lease payments: $50,000 at the beginning of each year.
  • First lease payment: 1 July 2019.
  • Lease expires: 1 July 2023.
  • Interest rate implicit in the lease: 8 per cent.
  • Guaranteed residual: $40 000.


  1. Determine the fair value of the portable sound recording studio at 1 July 2019
  2. Prepare a schedule for the lease payments incorporating accrued interest expense.
  3. Prepare the journal entries to account for the lease in the books of Hopeful Ltd at 1 July 2019, 30 June 2020 and 1 July 2020
  4. At the termination of the lease, Hopeful Ltd returns the portable sound recording studio to Lessor Ltd, but its fair value at that time is $25 000. What must Hopeful Ltd do to comply with the terms of the lease? Prepare the journal entries in the books of Hopeful Ltd for return of the asset to Lessor Ltd and the settlement of all obligations under the lease on 1 July 2023.

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