Question 2 In the year ending 31 December 2018, Happy Ltd bought a new machine and...

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Accounting

Question 2
In the year ending 31 December 2018, Happy Ltd bought a newmachine 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 thebasis for depreciation.
b What is depreciation? Why is it necessary?
c Explain the term ‘objectivity’ as used by accountants. To whatextent is depreciation objective?
d It is common practice in some countries to use the diminishingbalance for machines in the early years of an asset’s life and thenchange to the straight-line method as soon as this would give ahigher annual charge. What do you think of this practice?

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3.8 Ratings (481 Votes)

a Basis for depreciation Cost as per suppliers list 48000 All these costs have been incurred to put the machine to operation after purchase Less Discount received 4000 Add Delivery charge 400 Installation charge 800 Additional component to increase capacity 1600 Basis for depreciation 46800 Maintenance charge is for service after the machine is put into See Answer

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Question 2 In the year ending 31 December 2018, Happy Ltd bought a newmachine and made the following payments in relation to it:$Cost as per supplier’s list 48,000Discount received from the supplier 4,000Delivery charge 400Installation charge 800Maintenance charge 1,200Additional component to increase capacity 1,600Replacement parts 1,000Required:a Determine and justify the cost which should be used as thebasis for depreciation. b What is depreciation? Why is it necessary? c Explain the term ‘objectivity’ as used by accountants. To whatextent is depreciation objective? d It is common practice in some countries to use the diminishingbalance for machines in the early years of an asset’s life and thenchange to the straight-line method as soon as this would give ahigher annual charge. What do you think of this practice?