Question
Samba Ltd operates a furnace which originally cost R20 000 000 inclusive of R4 000 000 in respect of the cost of lining of the furnace. The useful life of the furnace is 20 years and it is expected that it will render a constant production until the end of its useful life with no residual value at any stage. The furnace linings need to be replaced every 5 years. At the end of their useful lives the linings will have no residual value. • The original purchase of the furnace took place on 2 January 20.8 and it was also available for use on that date. The lining was replaced on 30 June 20.12 at a cost of R6 000 000.
Required: Journalise all the transactions for the year ended 31 December 20.12. Disclose the furnace in the notes to the financial statements for the year ended 31 December 20.12
Required: Journalise all the transactions for the year ended 31 December 20.12. Disclose the furnace in the notes to the financial statements for the year ended 31 December 20.12
Answers
GPT-4o mini
To journalize the transactions for Samba Ltd for the year ended 31 December 20.12, we need to account for the depreciation of the furnace and its lining, and the replacement of the lining.
### 1. Depreciation Calculation for the Furnace
The original cost of the furnace is R20,000,000 with a useful life of 20 years and no residual value.
**Annual Depreciation on Furnace**:
\[
\text{Annual Depreciation} = \frac{\text{Cost}}{\text{Useful Life}} = \frac{R20,000,000}{20 \text{ years}} = R1,000,000
\]
### 2. Depreciation Calculation for the Lining
The cost of the lining is R4,000,000 and is replaced every 5 years.
**Annual Depreciation on Lining**:
\[
\text{Annual Depreciation on Lining} = \frac{\text{Cost}}{\text{Useful Life}} = \frac{R4,000,000}{5 \text{ years}} = R800,000
\]
### 3. Journal Entries
Here are the journal entries for each transaction during the year ended 31 December 20.12:
**a. Depreciation Expense for Furnace:**
On 31 December 20.12:
```
Dr Depreciation Expense (Furnace) R1,000,000
Cr Accumulated Depreciation (Furnace) R1,000,000
```
**b. Depreciation Expense for Lining:**
On 31 December 20.12:
```
Dr Depreciation Expense (Lining) R800,000
Cr Accumulated Depreciation (Lining) R800,000
```
**c. Replacement of Lining:**
The lining was replaced on 30 June 20.12 at the cost of R6,000,000:
```
Dr Lining (Furnace) R6,000,000
Cr Cash/Accounts Payable R6,000,000
```
### Summary of Journal Entries for the Year Ended 31 December 20.12
The journal entries for the year would consist of the above entries.
### Notes to the Financial Statements
**Notes to the Financial Statements for Samba Ltd for the Year Ended 31 December 20.12**
1. **Property, Plant, and Equipment:**
- **Furnace:**
- Cost: R20,000,000
- Accumulated Depreciation:
- Furnance Depreciation (R1,000,000/year * 5 years = R5,000,000)
- Lining Depreciation (R800,000/year * 5 years = R4,000,000)
- Carrying Amount: R20,000,000 - R5,000,000 (Furnace) - R4,000,000 (Lining) = R11,000,000
2. **Furnace Lining:**
- Cost: R4,000,000
- Lining replaced on 30 June 20.12 for R6,000,000, capitalized as part of Property, Plant, and Equipment.
- The new lining will be amortized over the next 5 years.
### Conclusion
The total recognition of depreciation on the furnace and lining reflects the usage of the asset throughout the year. The new lining is capitalized as a separate asset that will be depreciated in future periods. Adjustments for the replacement of the lining impact both cash flow and asset valuation on the balance sheet.
### 1. Depreciation Calculation for the Furnace
The original cost of the furnace is R20,000,000 with a useful life of 20 years and no residual value.
**Annual Depreciation on Furnace**:
\[
\text{Annual Depreciation} = \frac{\text{Cost}}{\text{Useful Life}} = \frac{R20,000,000}{20 \text{ years}} = R1,000,000
\]
### 2. Depreciation Calculation for the Lining
The cost of the lining is R4,000,000 and is replaced every 5 years.
**Annual Depreciation on Lining**:
\[
\text{Annual Depreciation on Lining} = \frac{\text{Cost}}{\text{Useful Life}} = \frac{R4,000,000}{5 \text{ years}} = R800,000
\]
### 3. Journal Entries
Here are the journal entries for each transaction during the year ended 31 December 20.12:
**a. Depreciation Expense for Furnace:**
On 31 December 20.12:
```
Dr Depreciation Expense (Furnace) R1,000,000
Cr Accumulated Depreciation (Furnace) R1,000,000
```
**b. Depreciation Expense for Lining:**
On 31 December 20.12:
```
Dr Depreciation Expense (Lining) R800,000
Cr Accumulated Depreciation (Lining) R800,000
```
**c. Replacement of Lining:**
The lining was replaced on 30 June 20.12 at the cost of R6,000,000:
```
Dr Lining (Furnace) R6,000,000
Cr Cash/Accounts Payable R6,000,000
```
### Summary of Journal Entries for the Year Ended 31 December 20.12
The journal entries for the year would consist of the above entries.
### Notes to the Financial Statements
**Notes to the Financial Statements for Samba Ltd for the Year Ended 31 December 20.12**
1. **Property, Plant, and Equipment:**
- **Furnace:**
- Cost: R20,000,000
- Accumulated Depreciation:
- Furnance Depreciation (R1,000,000/year * 5 years = R5,000,000)
- Lining Depreciation (R800,000/year * 5 years = R4,000,000)
- Carrying Amount: R20,000,000 - R5,000,000 (Furnace) - R4,000,000 (Lining) = R11,000,000
2. **Furnace Lining:**
- Cost: R4,000,000
- Lining replaced on 30 June 20.12 for R6,000,000, capitalized as part of Property, Plant, and Equipment.
- The new lining will be amortized over the next 5 years.
### Conclusion
The total recognition of depreciation on the furnace and lining reflects the usage of the asset throughout the year. The new lining is capitalized as a separate asset that will be depreciated in future periods. Adjustments for the replacement of the lining impact both cash flow and asset valuation on the balance sheet.