Green Light NCAs Question

mitch1

Hi, in preparation for my financial accounting exam, please could someone advise on how to answer this question? Thanks

The balance b/d on a sole trader's property, plant and equipment (PPE) account on 1 January 20X1 was £38,600. During the year ended 31 December 20X1 they sold a machine, which had cost £4,800 for proceeds of £2,400, and purchased a new machine to replace it. There were no other additions or disposals during the period. If the balance c/d on the PPE account on 31 December 20X1 is £50,200, what is the cost of the new machine?

shamilkaria

@mitch1

Hi, does the green light test give you the answer as £14,000 for the cost of purchasing the new asset? If correct I'll explain how I worked this out if not that means the opening balance (B/D) didn't include the cost of the assets before disposal

Many thanks

Shamil

mitch1

@shamilkaria Yeah, the cost of purchasing the asset is £14,000

shamilkaria

@mitch1

Hi Mitch,

Perfect thank you very much for confirming. Please see below the explaination as to how I got £14,000.

Right first thing you need to know whether Property Plant and Equipments (PPE - I may use this more short form) appears in the Profit or Loss Statement or Balance Sheet. We know from our studies it appears in the Balance Sheet why becayse Profit and Loss, shows Income and Expenditure whereas Balance Sheet shows, Assets, Liabilites and Equity and Property, Plant and Equipment is recognised as an Asset.

Next in your studies they would have taught you, DEAD CLIC or PEARLS. Both the same - These accounts are generally on the Debit Side - Debtors, Expenses, Assets, Drawings (DEAD). The following are generally on the Credit Side - Creditors, Liability, Income, Capital (CLIC). Its the same with PEARLS. Purchases, Expenses, Assests (Debit side). The following Revenue, Liability, Sales (Credit Side).

Now this will help us answer the question. Always use T ledger (I call it T because its the shape of a T) accounts (see my attachment, it will help you out)

We have a T Ledger for Property Plant and Equipment (PPE). You are told there is a Balance B/D of £38,600 on 1st January 20X1. Based on what I mentioned earlier Asset is a Debit. So on the T Ledger account you will have Balance B/D - 1st Jan 20X1 - £38,600 Debit Side.

Next you have been told that during the year an Asset has been sold, if an Asset is sold, that means the Debit Side will reduce as the asset has been sold. In order to reduce the Asset Account, you would need to post the entry on the opposite side, so Credit Side. They have told you in the Year End 31st Dec 20X1 that the proceeds of the Asset was £2,400. In simple proceeds just means Sale of an Asset. In accounting you need to remember that there always going to be double entry involved meaning two entries. So there cant just be a credit entry, there has to be a debit entry too. As we know the Asset has been sold, we will credit the Property Plant and Equipment account by £2,400. So the debit entry will be Bank Account or Cash Account - £2,400. (The Debit entry isnt relevant on this question its more just to give you an understanding.

So right now the Property Plant and Equipment is not balanced as the Debit entry is £38,600 and the Credit Side is £2,400. There is a different of £36,200 on the Credit Side in order for it to balance. They have told you only 1 asset purchased (which we are trying to work out the cost) and there have been no other assets purchased or disposed (sold).

From your accounting studies they would have taught you that the Balance C/D is always on the side which has a lower value in order to make the account balance. So we have worked out in this question the Credit Side is lower. We worked out there is a difference so far of £36,200 (see above calculation).

But they have told you that the Balance C/D at the Year End 31st Dec 20X1 is £50,200. We so far have a difference of £36,200. So now we need to work out the difference between £50,200 and £36,200 so, £50,200 - £36,200 = £14,000 (Cost of the Asset to make the account balance). If this seems still confusing see below I will explain it in simple

Property Plant and Equipment (PPE) account at the start was £38,600. But then we sold an asset for £2,400. This means that the Property Plant and Equipment (PPE) account currently sits at £38,600 - £2,400 = £36,200. You are told that on 31st Dec 20X1 that the balance C/D is £50,200. Just work out the difference between - £50,200 - £36,200 = £14,000. This is the cost of your new asset.

Sorry for the massive post, I think it was easier to break it all down. I hope this has helped you out, if not I do apologise.