In the year ending 31 December 2018, Happy Ltd bought a new machine and made the following
Question:
In the year ending 31 December 2018, Happy Ltd bought a new machine and made the following payments in relation to it:
$
Cost as per supplier’s list 48,000
Discount received from the supplier 4,000
Delivery charge 400
Installation charge 800
Maintenance charge 1,200
Additional component to increase capacity 1,600
Replacement parts 1,000
Required:
a. Determine and justify the cost which should be used as the basis for depreciation.
b. What is depreciation? Why is it necessary?
c. Explain the term ‘objectivity’ as used by accountants. To what extent is depreciation objective?
d. It is common practice in some countries to use the diminishing balance for machines in the early years of an asset’s life and then change to the straight-line method as soon as this would give a higher annual charge. What do you think of this practice?
Intermediate Accounting
ISBN: 978-0077400163
6th edition
Authors: J. David Spiceland, James Sepe, Mark Nelson