Contractors Ltd was formed on 1 January 2016 and the following purchases and sales of machinery were made during the first 3 years of operations.

Each machine was estimated to last 10 years and to have a residual value of 5 per cent of its cost price. Depreciation was by equal instalments, and it is company policy to charge depreciation for every month an asset is owned.

Required:

(a) Calculate (1) the total depreciation on Machinery for each of the years 2016, 2017 and 2018;
(2) the profit or loss on the sale of Machine 3 in 2018.

(b) Contractors Ltd depreciates its vehicles by 30 per cent per annum using the diminishing balance method. What difference would it have made to annual reported profits over the life of a vehicle if it had decided instead to depreciate this asset by 20 per cent straight line?

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Date 1 January 2016 1 October 2016 30 June 2018 1 July 2018 Asset Machines 1 and 2 Machines 3 and 4 Machine 3 Machine 5 Transaction Price purchase 40,000 each purchase 15,200 each sale 12,640 purchase 20,000