1.

i. Upgrade
Dr PPE $40,000
Cr Cash $40,000

Dr Dep Expense $16,000

Cr Acc Depreciation $16,000

PPE increase by 40,000

Acc Depreciation increase by 16,000
Cash decrease by 40,000
Retained earnings drop by 16,000

40,000 decrease in Cash flow from investing activities

Buy
Dr Loss on Disposal $8,000
Dr Acc Depreciation $60,000
Dr Cash $32,000
Cr PPE $100,000

Dr PPE $72,000
Cr Cash $72,000

Dr Dep Expense $12,000

Cr Acc Depreciation $12,000

PPE decrease by 28,000

Cash decrease by 40,000
Acc depreciation decrease by 48,000
Retained earnings decrease by 20,000

40,000 decrease in Cash flow from investing activities

ii.
a. If they want to maximise profit, they should go for the option that reduces their retained
earnings by the least, which is upgrade the existing machines, since buying a new one
and selling the old one requires them to realise a $8,000 disposal loss.
b. It is not the most optimal position. Assuming all transactions are in cash, cash position as
a result of either decisions is the same but buying a newer machine will have a lower
depreciation expense over the remaining years and has a longer useful life.
iii. Refer to part i
2.
i. $30,500
ii. Dr Expense $15,800
Dr Acc Depreciation $4,200
Cr PPE $20,000

Dr PPE $25,000
Cr Cash $25,000
iii. Depreciation before 1st March=$1,500
Depreciation after 1st March=$7,833
3.
i.
a. Research cost cannot be capitalised and must be expensed
b. Development cost can only be capitalised when 6 criteria are met
 1. The technical feasibility of completing the intangible asset so that it will be
available for use or sale
2. Its intention to complete the intangible asset and use or sell it
3. Its ability to use or sell the intangible asset
4. How the intangible asset will generate probable future economic benefits. Among
the other things, the entity can demonstrate the existence of a market for the
output of the intangible asset or the intangible asset itself or, if it is to be used
internally, the usefulness of the intangible asset
5. The availability of adequate technical, financial and other resources to complete
the development and to use or sell the intangible asset
6. Its ability to measure reliably the expenditure attributable to the intangible asset
during its development
c. Internally generated goodwill cannot be capitalised. It will only be capitalised as the
difference between a purchase price and the FV of the purchased asset.
It is to represent the future economic benefits arise from the assets acquired which is not
recognised in its FV.
ii. The Intangible Asset has to be revalued, as the fair value of it has dropped below its carrying
value.
Dr Expense $2600,000
Dr Acc Amortization $480,000
Cr Intangible Asset $720,000
iii. $20,000