Question

Deutsche Schnitzel, a producer of high quality German baked goods, adopted IFRS in 2005 with the rest of the European Union. Two years ago, DS replaced all of its machinery and decided to record it at fair value rather than historical cost. The purchase price of the machinery (in U.S. dollars) was $1,100,000. In addition, DS spent $75,000 in shipping and installation. Trial runs, including labor, materials, and applicable overhead, came to $50,000. DS assumes that the interest expense from their current loans for the new machinery was $25,000. Assume that DS uses straight line depreciation. The machinery has a 6 year useful life and a salvage value of $225,000. DS records a full year of depreciation in the year of purchase, regardless of when the purchased the asset.

1. Assuming that DS paid cash for the all costs associated with the purchase of the equipment, make the journal entry to record the historical cost of the new machinery.

2. At the end of that first year, the fair value of the machinery was $975,000. Ignoring taxes, make any necessary journal entries for the first year.

3. At the end of the next year, the fair value of the machinery was $900,000. Ignoring taxes, make any necessary journal entries for the second year.

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