A manufacturing company starts in business on 1 January 2015. On that date, it purchased a machine by cheque to be used in its manufacturing operations. Demand is expected to be constant, and the machine is expected to be used over a period of eight years with zero residual value at the end of its useful life. (a) Using any amount between RM10, 000 and RM50, 000 as the machine cost, prepare a table comparing the annual depreciation charges and the net book values for the first FIVE (5) years using the straight line method and the reducing balance method. For the reducing balance method, you are to use a depreciation rate of between 35% and 50% per annum. (b) In your opinion, which method of depreciation is more appropriate for the machine? Explain in not more than 100 words. (c) In not more than 300 words, critically discuss THREE (3) causes of depreciation that are relevant to the machine.
Depreciation Methods
The word "depreciation" is defined as an accounting method wherein the cost of tangible assets is spread over its useful life and it usually denotes how much of the assets value has been used up. The depreciation is usually considered as an operating expense. The main reason behind depreciation includes wear and tear of the assets, obsolescence etc.
Depreciation Accounting
In terms of accounting, with the passage of time the value of a fixed asset (like machinery, plants, furniture etc.) goes down over a specific period of time is known as depreciation. Now, the question comes in your mind, why the value of the fixed asset reduces over time.
A manufacturing company starts in business on 1 January 2015. On that date, it purchased a machine by cheque to be used in its manufacturing operations. Demand is expected to be constant, and the machine is expected to be used over a period of eight years with zero residual value at the end of its useful life.
(a) Using any amount between RM10, 000 and RM50, 000 as the machine cost, prepare a table comparing the annual
(b) In your opinion, which method of depreciation is more appropriate for the machine? Explain in not more than 100 words.
(c) In not more than 300 words, critically discuss THREE (3) causes of depreciation that are relevant to the machine.
(d) The machine was sold for cash at 40% of its purchase price on 31 December 2018. It is the company’s policy not to charge depreciation in the year of disposal. Prepare for EACH method of depreciation (straight line and reducing balance) the following accounts up to 31 December 2018:
(I) The machinery account
(ii) The
(iii) The disposal account showing clearly the profit or loss on disposal.
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