Question
On January 1, 2026, Vertex Manufacturing purchases a production system for $1,500,000, containing core equipment ($1,000,000, 10-year life) and a specialized motor ($500,000, 5-year life), available for use immediately, zero residual values. On December 31, 2027, the company spends $140,000 replacing a major part of the core equipment but incorrectly records the entire amount as repairs expense; the error is found before the 2027 financial statements are finalised. The replaced part originally cost $180,000 and had been depreciated with the rest of the core equipment (accumulated depreciation of $36,000 at the replacement date); the new part has a useful life of 7 years from January 1, 2028. On January 1, 2028, management extends the remaining useful life of the rest of the core equipment from 8 to 10 years due to technological improvements. On December 31, 2029, the system is impaired: immediately before impairment, carrying amount = $724,800, recoverable amount = $650,000, remaining useful life = 4 years, residual value = $10,000. On December 31, 2030, the system is sold for $520,000 (after one year of post-impairment depreciation).
Required: Prepare the original component depreciation, correct the 2027 error, derecognize the replaced component, determine the new component's depreciation, record the impairment, calculate post-impairment depreciation, and determine the gain on disposal.
Statements in this challenge
- Original Annual DepreciationNumeric Answer
- Correct the 2027 ExpenditureJournal Entry
- Derecognize Replaced ComponentJournal Entry
- New Component DepreciationNumeric Answer
- Impairment EntryJournal Entry
- Post-Impairment DepreciationNumeric Answer
- Gain on DisposalNumeric Answer
Scoring
- 40% Account naming / line matching
- 40% Amount correctness
- 20% Structure / section placement
How to approach this
IAS 1 — Presentation of Financial Statements
A composite challenge links several statements built from one set of data, so figures flow between them: profit reaches retained earnings, and the closing balances feed the position statement. Complete them in the order the statements depend on each other rather than the order of the tabs.
Common mistakes
- Preparing each statement independently, so the linking figures disagree.
- Carrying a figure forward before finishing the adjustments that change it.
- Reworking a linked figure in one statement without updating it in the others.
Further readingIAS 1: what goes where in a full set of statements