Peters Ltd Has a Machine That Originally Cost $20 000

question 74

Multiple Choice

Peters Ltd has a machine that originally cost $20 000 and has accumulated depreciation of $5000.Its remaining life is assessed to be 5 years with no salvage value.The directors of Peters Ltd decide on 1 July 2003 to revalue the machine.They are unable to find market information on a machine in a similar state to theirs,so the market value of a new machine of the same type,$30 000,is used as a basis.What is/are the appropriate journal entry(ies) using the gross method to record the revaluation?

• A)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Accumulated depreciation-machine } & 5000 & \\
• \hline \mathrm { Cr } & \text { Machine } & & 5000 \\
• \hline & & & \\
• \hline \mathrm { Dr } & \text { Machine } & 15000 & \\
• \hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 15000 \\
• \hline
• \end{array}\]
• B)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Machine } & 15000 & \\
• \hline \mathrm { Cr } & \text { Accumulated depreciation } & & 5000 \\
• \hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 10000 \\
• \hline
• \end{array}\]
• C)
• \[\begin{array} { | l | l | l | l | }
• \hline \mathrm { Dr } & \text { Machine } & 10000 & \\
• \hline \mathrm { Cr } & \text { Accumulated depreciation } & & 2500 \\
• \hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 7500 \\
• \hline
• \end{array}\]
• D)
• \[\begin{array} { | l | l | r | r | }
• \hline \mathrm { Dr } & \text { Accumulated depreciation-machine } & 5000 & \\
• \hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 5000 \\
• \hline & & & \\
• \hline \mathrm { Dr } & \text { Machine } & 15000 & \\
• \hline \mathrm { Cr } & \text { Asset revaluation reserve } & & 15000 \\
• \hline
• \end{array}\]

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Definitions:

Variable Overhead

Costs that change in proportion to the level of manufacturing or service activities, such as materials and utilities.

Labour Efficiency Variance

It measures the effectiveness of labor usage by comparing the budgeted hours for a set level of production against the actual hours worked, indicating efficiency or inefficiency in labor use.

Static Budget

A budget that does not change or adjust over the period, established at the start of a period and based on a fixed level of activity.

Standard Costing

A cost accounting system that assigns a fixed cost to inventory with the variance analyzed to improve cost control and management decisions.