Damian is an entity which prepares financial statements, in accordance with International Financial Reporting Standards (IFRS), to 30 September each year. On 1 April 2018, Damian accepted delivery of a large and complex machine from a supplier. The agreed purchase price for the machine was £2 million. Damian received 10% trade discount. On 1 April 2018, Damian incurred direct costs of £50,000 in handling the machine and £25,000 in installing the machine at its premises. Although the machine was ready for use from 1 April 2018, Damian did not bring the machine into use until 30 April 2018. During April 2018 Damian incurred costs of £200,000 in training relevant staff to use the machine. The directors of Damian estimate that the machine is capable of being usefully employed in the business until 31 March 2023, and that it will have no residual value at that date. Damian uses the straight-line method for calculating the depreciation. On 31 March 2023, Damian will be legally required to decommission the machine using the original supplier. The directors of Damian estimate that the cost of safely decommissioning the machine on 31 March 2023 will be £3 million. At an appropriate discount rate, the present value of the cost of decommissioning is expected to be £2.043 million. Required: Show with appropriate calculations how the above events would be reported in the financial statements of damian for the year ended 30 September 2018.
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.
Damian is an entity which prepares financial statements, in accordance with International Financial Reporting Standards (IFRS), to 30 September each year.
On 1 April 2018, Damian accepted delivery of a large and complex machine from a supplier. The agreed purchase price for the machine was £2 million. Damian received 10% trade discount.
On 1 April 2018, Damian incurred direct costs of £50,000 in handling the machine and £25,000 in installing the machine at its premises. Although the machine was ready for use from 1 April 2018, Damian did not bring the machine into use until 30 April 2018.
During April 2018 Damian incurred costs of £200,000 in training relevant staff to use the machine.
The directors of Damian estimate that the machine is capable of being usefully employed in the business until 31 March 2023, and that it will have no residual value at that date. Damian uses the straight-line method for calculating the
Required:
Show with appropriate calculations how the above events would be reported in the financial statements of damian for the year ended 30 September 2018.
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