Question: Depreciation of Machinery
In early July 2013 Admirable Ltd is considering the acquisition of some machinery for $1200 000 plus GST to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500 000 units of the new product. The residual value of the machinery is $100 000.
The following projections were made in order to select a depreciation method to be used for the machinery:
|
Year ended 30 June
|
Units of Output
|
Repairs and Maintenance
|
Profit before depreciation
|
|
2014
|
50000
|
$70000
|
$350000
|
|
2015
|
45000
|
60000
|
340000
|
|
2016
|
55000
|
90000
|
355000
|
|
2017
|
58000
|
95000
|
360000
|
|
2018
|
60000
|
100000
|
380000
|
In calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense.
Required
A. As the accountant for Admirable Ltd, prepare separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods: (a) straight-line, (b) diminishing- balance, (c) sum-of-years-digits, and (d) units-of production.
Use the following headings for each schedule: 'Year ending 30 June', 'Annual depreciation expense', 'Accumulated depreciation', 'Carrying amount at end of year'.
B. Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in the report your recommendations on the choice of method consistent with the requirements of IAS 16/AASB 116. Support your recommendations with schedules showing the total annual cost of operating the machinery, and the profit after depreciation.