Calculation of Depreciation, Journal Entries for Asset Retirement Obligation, Gross Profit Calculation, Impairment of Goodwill

Solution-1
Financial Statements includes information regarding the income, expenses, assets and liabilities of the
company. One of such information is depreciation on the fixed assets of the company. Depreciation is an
important expense as it helps in reflecting the true and fair picture of the fixed assets of the company.
Depreciation is the reduction in value of the assets due to the assets usage over the period of time,
technology obsolesces and other wear and tear to the asset. Hence, calculation of accurate depreciation is
an important aspect (ProfitBooks.net, 2018).
While preparing the first set of financial statements, the company needs to decide on various factors in
order to calculate depreciation. These factors are (Realassetmgt.com, 2018):
(a) Useful life - This represents the number of life the company is expected to use the assets or the
number of life till the asset will work effectively without incurring any heavy cost over it.
(b) Cost - This represents the cost of assets incurred to put it to use or getting it ready for the
intended purpose or production. These costs include the purchase price, installation cost,
transportation cost, taxes and duties levied on purchase cost, etc.
(c) Salvage value – This represents the residual value or scrap value that the company will be able to
get at the end of the assets life, by selling it. The scrap value is an important aspect while
calculating the depreciation as the formula for calculating the depreciation is
(Cost - Scrap Value)/useful life
(d) Method of depreciation – Another important matter while calculating the depreciation is selection
of method for depreciation. As per AASB, there are 3 methods which can be used for calculating
the depreciation. These methods are straight line method, reducing balance method and units of
production method. The company needs to select the most appropriate method as per their line of
business.

Solution-2
In the books of Midnight Boil Ltd.
Journal Entries
Date Particulars Debit ($) Credit ($)
30-Jun-18 CWIP 12,550,000
To Cash 12,550,000
(To record expenses incurred on construction)
30-Jun-18 CWIP 4,001,500
To Cash 4,001,500
(To record expenses incurred on construction)
01-Jul-18 Nuclear Power Generator 16,551,500
To CWIP 16,551,500
(To record asset recognized in books upon
completion of construction)
01-Jul-18 Nuclear Power Generator 809,641
To Provision for Asset Retirement Obligation 809,641
(To record provision for dismantling cost)
30-Jun-19 Interest expense 80,964
To Provision for Asset Retirement Obligation 80,964
(To record interest expenses on dismantling cost)
30-Jun-24 Interest expense (refer WN-1) 130,393
To Provision for Asset Retirement Obligation 130,393
(To record interest expenses on dismantling cost)
WN-1 Calculation of Interest expenses
For the year ended
Interest
expenses
Provision for
dismantling cost
30-Jun-18 - 809,641
30-Jun-19 80,964 890,605
30-Jun-20 89,060 979,665
30-Jun-21 97,967 1,077,632
30-Jun-22 107,763 1,185,395
30-Jun-23 118,540 1,303,935
30-Jun-24 130,393 1,434,328
30-Jun-25 143,433 1,577,761
30-Jun-26 157,776 1,735,537

30-Jun-27 173,554 1,909,091
30-Jun-28 190,909 2,100,000