Marks Limited is a manufacturing company with a 30 June year-end. The company bought a new manufacturing machine on 1 July 2020 for R3 500 000, payable on 30 June 2021. The cost price was paid in cash on 30 June 2021. The machine was ready for use on 1 July 2020, and on this date, it was estimated that the machine would be used for 150 000 hours and that the machine has a residual value of R250 000.
The machine was used for 21 567 hours for the year ending 30 June 2021. Depreciation is recognised using the straight-line method. The machine requires a monthly oil change to ensure that it operates efficiently. Marks Limited's maintenance team does the oil change. They also check the machine for any parts that might require replacement. The monthly maintenance checks usually require small parts and oil with insignificant value compared to the machine's value. Assume a market-related interest rate of 12% per annum standard credit terms of 120 days.

REQUIRED:

1) Prepare all the journal entries required in the records of Marks Limited for the financial year ending 30 June 2021 to account for the machine. Round all answers to the nearest Rand.

2) Discuss whether the salaries of the maintenance team and the cost of the oil and parts used during the monthly maintenance should be capitalised or expensed.

Answer rating: 100% (QA)

Step 1 Depreciation for Machinery Using Machine hour Basis While using the straight line method of depreciation the calculation process taken up the t... View the full answer