Question: XYZ Packaging Ltd purchased equipment for $310,750 on 1 January 2015 for use in its parcel packaging business. XYZ's management estimates that the equipment will be technologically obsolete in 5 years, at which time it will have a residual value of $26,000. The equipment will produce 60,000 batches of parcels in the first year, with annual production decreasing by 5,000 batches during each of the next 4 years (i.e., in the fifth year the equipment will be down to 40,000 batches of production capability).
Required: (a) For each of three depreciation methods (straight-line, units-of-production, and reducing balance), prepare a depreciation schedule from acquisition showing the following balances each year for the 5 years: asset cost, depreciation expense, accumulated depreciation and asset carrying amount. For the reducing balance method, use a depreciation rate based on 45%.
(b) Depreciation is a concept used in accrual accounting. Of the depreciation methods above discuss the reasons for selecting one alternative method of depreciation over another as dictated by accrual accounting and the matching principle. (60 words limit)
(c) Depreciation allocates cash to eventually replace the asset once it has reached the end of its useful life. Discuss, stating whether you agree or disagree with the statement and why? (40 words limit)