Question

HINT: For P9-3 (b), prepare a depreciation schedule for each method. P9-3A Mazlin Limited purchased a machine on account on April 2, 2018, at an invoice price of $360,000. On April 4, it paid $2,000 for delivery of the machine. A one-year, $4,000 insurance policy on the machine was purchased on April 5. On April 18, Mazlin paid $8,000 for installation and testing of the machine. The machine was ready for use on April 30. Mazlin estimates the machine's useful life will be five years or 6,200 units with a residual value of $80.000. Assume the machine produces the following numbers of units each year: 940 units in 2018; 1,460 units in 2019; 1,400 units in 2020; 1,300 units in 2021; and 1,100 units in 2022. Mazlin has a December 31 year end. Instructions (a) Determine the cost of the machine. (b) Calculate the annual depreciation and total depreciation over the asset's life using (1) the straight-line method, (2) the double- diminishing-balance method, and (3) the units-of-production method. Round the depreciation cost per unit to the nearest cent. Which method causes net income to be lower in the early years of the asset's life? (c) Assume instead that, when Mazlin purchased the machine. there was no residual value and the company had a legal obligation to ensure that the machine would be recycled at the end of its useful life. The cost of the recycling will be significant. Would this have an impact on the answer to part (a) above? Explain.

Answer 1

(a)	Cost of Machine
	Purchase Price	$360,000
	Delivery Charges	$2,000
	Insurance expense	$4,000
	Installation Charges	$8,000
		$374,000
(b)	Calculation of Depreciation
1. Straight Line Method(SLM)
	Cost of Machine =	374,000
	Residual Value =	80,000
	Useful Life	5	Years
	Depreciation per annum as per SLM=		(Cost of Machine-Residual Value)/useful life
			= (374000-80000)/5
			$58,800
	Rate of depreciation =		15.72%
	Date	Particulars	Debit	Date	Particulars	Credit
	02-Apr-18	Bank(purchase)	$360,000.00	31-Dec-18	Depreciation (For 8 months)	$39,200.00
	04-Apr-18	Bank(delivery)	$2,000.00	31-Dec-18	Balance c/d	$334,800.00
	05-Apr-18	Bank(Insurance)	$4,000.00
	18-Apr-18	Bank(Installation)	$8,000.00
			$374,000.00			$374,000.00
	01-Jan-19	Balance b/d	$334,800.00	31-Dec-19	Depreciation	$58,800.00
				31-Dec-19	Balance c/d	$276,000.00
			$334,800.00			$334,800.00
	01-Jan-20	Balance b/d	$276,000.00	31-Dec-20	Depreciation	$58,800.00
				31-Dec-20	Balance c/d	$217,200.00
			$276,000.00			$276,000.00
	01-Jan-21	Balance b/d	$217,200.00	31-Dec-21	Depreciation	$58,800.00
				31-Dec-21	Balance c/d	$158,400.00
			$217,200.00			$217,200.00
	01-Jan-22	Balance b/d	$158,400.00	31-Dec-22	Depreciation	$58,800.00
				31-Dec-22	Balance c/d	$99,600.00
			$158,400.00			$158,400.00
	01-Jan-23	Balance b/d	$99,600.00	31-Dec-23	Depreciation	$19,600.00
				31-Dec-23	Balance c/d	$80,000.00
			$99,600.00			$99,600.00
		Hence, Depreciation(SLM)
		For year 1	(May to Dec)	$39,200.00
		For year 2		$58,800.00
		For year 3		$58,800.00
		For year 4		$58,800.00
		For year 5		$58,800.00
		For year 6	(Jan to April)	$19,600.00
3	Double diminish balance method
			31.44%
	Opening Value	Depreciation	Closing value
	$374,000.00	$78,400.00	$295,600.00
	$295,600.00	$92,948.02	$202,651.98
	$202,651.98	$63,721.58	$138,930.39
	$138,930.39	$43,685.07	$95,245.33
	$95,245.33	$15,245.33	$80,000.00
3	Units of production method
		Year	Units	Depreciation Rate	Depreciation
		For year 1	940	15.16%	$56,703.23
		For year 2	1460	23.55%	$88,070.97
		For year 3	1400	22.58%	$84,451.61
		For year 4	1300	20.97%	$78,419.35
		For year 5	1100	17.74%	$66,354.84
			6200
	As Depreciation amount in double diminishing balance method is higher in initial year, hence Net Income will be be lower in the earlier year of assets life
('C)	If recycling cost of the asset is significant, then present value of such cost shall be calculated by Mazlin and same should be capitalized along with purchase Cost