Question

Phillips Ltd. purchased a machine on 26 March 20X3 for $94,000 and began to use it immediately. The estimated useful life of the machine is 5 years, and it has an expected residual value of $10,100 at that time. Phillips uses straight-line depreciation. Required: 1 & 2. Calculate annual depreciation for 20X3 through 20X8 assuming that depreciation is calculated to the nearest month using three accounting conventions: a. Half-year convention b. Full-first-year convention c. Final-year convention Year Month Half year Full first year Final year 20x3 20X4 20X5 20x6 20X7 20X8 3. Calculate the gain or loss on disposal assuming that the asset is unexpectedly sold for $6,100 at the end of 20X6, using net book value from requirement 1, and then from the three alternatives in requirement 2 Year Month Half Year Full First Year Final Year Proceeds, 20X6 Net book value, 20X6 0 0 0 0

Answer 1

Method Formula Calculation Amount (Cost - Residual Value) Useful Life Straight Line (94000-10100)/5 16,780 Month Year 20X3 20X4 20x5 20X6 Half Year (Month X Annual Annual Depreciation Deprciation) 16780 8,390 16780 16,780 16780 16,780 16780 16,780 16780 16,780 167801 8,390 58,730 Total depreciation till 20X6 20x7 20x8 Month Year 20x3 20X4 20x5 20x6 Full first year (Month X Annual Annual Depreciation Deprciation) 16780 16,780 16780 16,780 16780 16,780 16780 16,780 16780 16,780 16780 67,120 Total depreciation till 20X6 20x7 20x8 Month Year 20X3 20X4 Final year (Month X Annual Annual Depreciation Deprciation) 16780 16780 16,780 16780 16,780 16780 16,780 16780 16,780 16780 16,780 20x5 20x6 50,340 Total depreciation till 20X6 20x7 20x8 Half Year 6,100 94,000 Full First Year 6,100 94,000 Final Year 6,100 94,000 58,730 67,120 50,340 3 Year Month Proceeds, 20X6 Cost Total depreciation till 20X6 Net book value, 20x6 (Cost - Total depreciation) Loss (Net Book Value - Proceeds) 35,270 26,880 43,660 29,170 20,780 37,560