Question

P9-3A Mazlin Limited purchased a machine on account on April 2, 2018, at an invoice price o $360,000. On April 4, it paid $2,000 for delivery of the machine. A one-year, S4,000 insurance policy on the machine was purchased on April 5. On April 18, Mazlin paid $8,000 forinstallatie 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 valu of $80,000. Assume the machine produces the following numbers of units each year: 940 units 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-productio 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 i useful life. The cost of the recycling will be significant. Would this have an impact on the answ to part (a) above? Explain.

Answer 1

(a)Cost of the Machine:

Invoice price: $ 360000

Add : Delivery charges: $2000

Installation Charges: $8000

Total Cost of the machine= $370000.

NOTE: Cost of the machine does not include the insurance charges.

(B)Depreciation Calculation:

Straight line method: (Cost of the asset- residual value) divided by estimated life

($370000- $80000)/5= 290000/5= $58000

Double diminishing method:

Percentage of straighline depreciation= 100%/useful life= 100%/5= 20%

Double diminishing Rate of depreciation= 20%*2 = 40%

Depreciation= $370000*40%= $148000

Units of production method:

Annual Depreciation=(Depreciable Value×Units produced during the year)/Estimated total production

Depreciable Value = Original cost – Scrap value

= $370000-$80000= $290000

Depreciation= ($290000*940)/6200 = $43967.7

As the depreciation under double diminishing method is higher, net income would be lower under this method.

(C) in this case , the cost of recycling will be deducted while calculating the cost of the asset