Acquisition and Depreciation

On 1st January 2016 Special Ltd acquired a wood lathe for $75 000 which included shipping charges of $5 000. The lathe has an estimated useful life of 5 years (15 000 machine hours of operation) and a residual value of $15 000. Insurance on the lathe while in transit was $3,000 insurance against damage for 1 year amounted to $6,500. Finally installation costs were $2,200 and test runs before commissioning totalled $2,000.

During the first year of operations the machine was operated for 5 550 hours

Required:

A. Calculate the cost of the lathe

B. Calculate the depreciation for the year ending 31 December 2016 using each of the following methods:

(i) Straight Line

(ii) Units of production

(iii) Diminishing balance (use rate of 38%)

(iv) Sum of the years digits.

C. The nature of depreciation is discussed in IAS 16/AASB 116. Outline alternative views considered for the accounting treatment of depreciation and discuss the rationale for the treatment adopted in the standard. ( 500 words)

Question 2:

Discuss the ethics and governance in changing depreciation methods for the case below (1 000 words)

Pringles Ltd is a large department store that has used the straight-line depreciation method since the company was first formed. For the year ended 30 June 2015, the company made a record profit and management expected these high profits to continue at least into 2016 and 2017, although economists were generally predicting an economic slowdown and a subsequent fall in profits in 2018 and 2019. The general manager, Peter Pringle, approached the accountant, Marion Mason, and asked her if she could find a way to reduce the profit in the next couple of years and transfer it to 2018 and 2019 when things may not be going so well. ‘This would give us consistent profits over the next few years and keep our shareholders happy,' said Peter.

Although Marion did not feel that Peter's reason for the change was justified, she was concerned that her contract with the company would not be renewed if she upset the general manager. After some consideration, Marion decided to change the depreciation method from the straight-line method to the sum-of-years'-digits method. Marion did not disclose this change in the notes to the financial statements as she felt that the reason given by Peter would not give a good impression