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On 1 January 2008, Kilmartin Ltd purchased new property for €480,000 consisting of land €80,000 and buildings €400,000 - Leaving Cert Accounting - Question 3 - 2019
Question 3
On 1 January 2008, Kilmartin Ltd purchased new property for €480,000 consisting of land €80,000 and buildings €400,000. The company depreciates buildings at the rate... show full transcript
Worked Solution & Example Answer:On 1 January 2008, Kilmartin Ltd purchased new property for €480,000 consisting of land €80,000 and buildings €400,000 - Leaving Cert Accounting - Question 3 - 2019
Step 1
Prepare the relevant ledger accounts in respect of the above transactions for the years ended 31/12/2014 to 31/12/2018
Answer
Ledger Accounts
Land and Buildings Account
| Date | Details | Dr (€) | Cr (€) | Balance (€) |
|---|---|---|---|---|
| 01/01/14 | Balance b/d | 480,000 | 480,000 | |
| 01/01/14 | Revaluation reserve | 140,000 | 620,000 | |
| 31/12/14 | Balance c/d | 620,000 | 620,000 | |
| 01/01/15 | Bank | 130,000 | 750,000 | |
| 01/01/15 | Wages | 25,000 | 775,000 | |
| 01/01/15 | Building contractor | 50,000 | 825,000 | |
| 31/12/15 | Balance c/d | 825,000 | 825,000 | |
| 01/01/16 | Sold | 170,000 | 655,000 | |
| 01/01/16 | Revaluation reserve | 70,000 | 725,000 | |
| 31/12/16 | Balance c/d | 715,000 | 715,000 | |
| 01/01/18 | Sold | 225,000 | 490,000 | |
| 31/12/18 | Balance c/d | 490,000 | 490,000 |
Revaluation Reserve Account
| Date | Details | Dr (€) | Cr (€) | Balance (€) |
|---|---|---|---|---|
| 01/01/14 | Balance | 48,000 | 48,000 | |
| 31/12/14 | Balance c/d | 8,000 | 48,000 | |
| 01/01/16 | Revenue reserve | 40,000 | 89,200 | |
| 31/12/18 | Balance c/d | 405,000 | 405,000 |
Provision for Depreciation Account
| Date | Details | Dr (€) | Cr (€) | Balance (€) |
|---|---|---|---|---|
| 01/01/15 | Balance b/d | 24,100 | 24,100 | |
| 31/12/15 | Profit & Loss | 14,300 | 38,400 | |
| 31/12/16 | Profit & Loss | 14,300 | 24,600 | |
| 01/01/18 | Disposal | 16,920 | 38,400 | |
| 31/12/18 | Balance c/d | 31,220 | 31,220 |
Repairs Account
| Date | Details | Dr (€) | Cr (€) | Balance (€) |
|---|---|---|---|---|
| 31/12/16 | Balance c/d | 10,000 | 10,000 |
Disposal Account
| Date | Details | Dr (€) | Cr (€) | Balance (€) |
|---|---|---|---|---|
| 01/01/16 | Land and buildings | 120,000 | 120,000 | |
| 01/01/16 | Profit on disposal | 50,000 | 170,000 |
Note:
All calculations were made in consideration of the depreciation policy of charging a full year’s depreciation in the year of acquisition and no depreciation in the year of disposal.
Step 2
Step 3
Distinguish between capital and revenue expenditure
Answer
Capital Expenditure vs Revenue Expenditure
-
Capital Expenditure refers to expenditures on items where the benefit derived is expected to last a long time (more than one year).
- Examples: Purchase of land, erection of buildings, purchase of machinery, etc.
-
Revenue Expenditure refers to expenditures where the benefit derived is of a temporary nature (less than one year).
- Examples: Annual rates, light and heat, repairs, etc.
Step 4
Explain what is meant by a revenue reserve in the context of revaluation
Answer
Revenue Reserve in the Context of Revaluation
A revenue reserve is undistributed profit not paid out to the owners in dividends; it is profit retained by the business.
When assets are revalued, the increase in value is recorded in a revaluation reserve instead of being directly distributed. However, the profit made on these revalued fixed assets isn’t transferred to the revenue reserve until the fixed asset is sold. Thus, the revenue reserve reflects retained earnings that can be used for various business needs.