In the year to 31 December 20X3, Amy bought a new non-current asset and made the following payments in relation to it

________________________________________________ £.......................£

Cost as per supplier's list....................................12,000

Less: agreed discount...........................................1,000.......11,000

Delivery charge............................................................................100

Erection charge...........................................................................200

Maintenance charge..................................................................300

Additional component to increase capacity............................400

Replacement parts.....................................................................250

Required

a. State and justify the cost figure that should be used as the basis for depreciation.

b. What does depreciation do, and why is it necessary?

c. Briefly explain, without numerical illustration, how the straight-line and reducing balance methods of depreciation work. What different assumptions does each method make?

d. It is common practice in published financial statements in Germany to use the reducing balance method for a non-current asset in the early years of its life, and then to change to the straight-line method as soon as this would give a higher annual charge. What do you think of this practice? Refer to relevant accounting conventions in your answer.