Question

(a) Reda Company is planning to acquire a machine. The following costs relate to the machine: List price Tax Freight New parts to replace those damaged in unlouding Installation Repair of vandalism during installation Assembly Special foundation to be laid on the floor Testing for use Monthly maintenance S 80.000 6.00 1.000 2.000 1.500 1.200) 2.200 3.800 1,500 300 A 10% discount will be given off the list price. Identify and compute the cost of the machine. Explain your reasoning. (12 marks) (b) Harrison Company purchased a piece of machinery for $100,000 on 1 July 2017. The residual value is $20,000 and the expected useful life is 8 years. Compute the depreciation expense and net book value of the machinery for the years 2017, 2018 and 2019 using: (1) Straight line method (ii) Double declining balance method. (13 marks) Explain depreciation. What are the arguments for using the double declining balance method of depreciation? (10 marks) (c)

Answer 1

(A)

Particulars	Amount ($)
Price (80,000 - 8,000)	72,000
Tax	6,000
Freight	1,000
Replacement cost	2,000
Installment	1,500
Repaire during installment	1,200
Assembly	2,200
Special Foundation Cost	3,800
Testing for Use	1,500
Total	91,200

Working Notes-

List price = 80,000 , Discount = 10% on List Price = 8,000

So, Purchase price = 80,000 - 8000 = $72,000

The cost of Machine includes purchase price, taxes, transportation, installment & assembly and all other cost which makes machine ready to use but it does not include regular operational cost i.e. Maintenance cost.

(B)

Purchase price of Machine = $1,00,000

Residual Value = $20,000

Useful Life = 8 years

(i) Straight Line Method

Depreciation Expenses = (Fixed cost of machine - residual value) / useful life

= (1,00,000 - 20,000) / 8

= 80,000 / 8

=10,000

Year	Book Value at Begining Year	Depreciation	Book Value at end Year
2017	1,00,000	5,000	95,000
2018	95,000	10,000	85,000
2019	85,000	10,000	75,000

As Machine was purchased on July 1, 2017 so depreciation will be calculated for the 6 months only that is $5,000

(ii) Double Declining Balance Method

Rate of Depretiation = 100% / 8 years = 12.5%

Then multiply 12.5% by 2

12.5 x 2 = 25%

Double decline depretiation rate is 25%

Year	Book Value at Begining Year	Depreciation (25%)	Book Value at end Year
2017	1,00,000	12,500	87,500
2018	87,500	21,875	65,625
2019	65,625	16,406.25	49,218.75

As Machine was purchased on July 1, 2017 so depreciation will be calculated for the 6 months only that is (25,000/2 ) = 12,500

(C)

Depreciation - Depreciation is accounting method which is used for the allocating the cost for the physical assets like machine, building, plant over its useful life. It represents that how much value of a physical assets has been used till now.

Doubling Decline Balance Method of Depreciation - Doubling Decline Balance Method of Depreciation counts depreciation on assets more rapidly as compared as straight line method. It is helpulful in showing more depretiation expendeture and depreciate assets value twice quickly.