Question

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 witha 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 202; 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. English (United States) Page 1 of 5 1115 words

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Answer 1

a.) Calculation of Cost of Machine Particulars Invoice Price Payment For Delivery of Machine Insurance (Paid Before Put to Use) Installation Charges Cost of Machine Amount $360,000.00 $ 2,000.00 $ 4,000.00 $ 8,000.00 $374,000.00 b.) Calculation of depreciation - 1. SLM Method Cost of Machine -Salvage Value Life Depreciation $ 374,000.00 $ 80,000.00 5 Years Cost - Salvage Value No. Of Year 374000-80000 Depreciation P.A. Total Depreciation $ 58,800.00 $ 58,800.00 $ 294,000.00

2. Double Diminshing Balance Method Depreciation Rate = 100/Life * 2 = 40% Year Opening Balance | Deprecation closing Balance 1 $ 374,000.00 $ 149,600.00 $ 224,400.00 2 $ 224,400.00 $ 89,760.00 $ 134,640.00 $ 134,640.00 $ 53,856.00 $ 80,784.00 4 $ 80,784.00 $ 784.00 $ 80,000.00 5 $ 80,000.00 $ - $ 80,000.00 Depreciation will not be calculated if closing balance falls below Salvage Value. Hence in Year - 4 Deapreciation as per rate will be 32314 but closing balance will not below salvage value. So dep. will be 784 in year -4 3. Unit Production Method Dep. = (Cost-Salvage Value) *Production Per Year Estimated Total Prod. Units 374000-80000 6200 47.42 Dep. Per Unit =

Depreciation/Unit 47.42 47.42 47.42 47.42 47.42 Units Produced 940 1460 1400 1300 1100 Depreciation $ 44,574.19 $ 69,232.26 $ 66,387.10 $ 61,645.16 $ 52,161.29 Dep. Per Unit Year Units Produced 1. SLM Method 2. Double Dimin shing Balance Method 3. Unit Production Method i 2 Depreciation P.A 2. Double 3. Unit 1. SLM Dimin shing Production Method Balance Method Method $ 58,800.00 $ 149,600.00 $ 44,574.19 $ 58,800.00 $ 89,760.00 $ 69,232.26 $ 58,800.00 $ 53,856.00 $ 66,387.10 $ 58,200.00 $ 784.00 $ 61,645.16 $ 58,800.00 $ - $52,161.29 940 1460 1400 1300 1100 62.55 $ 40.27 $ 42.00 $ 45.23 $ 53.45 $ 159.15 $ 61.48 $ 38.47 $ 0.60 $ 47.42 47.42 47.42 47.42 47.42 4 5 Depreciation is computed higher in early years in double dimin shing method so net income will be lower in early years of assets life. c.) there will be no impact if there is no residual value of assets because residual value does not reduce the cost of assets. hence there will be no impact.