A business purchased two rivet-making machines on 01 January 2005 at a cost of Rs 15,000 each. Each had an estimated life of 5 years and nil residual value. The straight line method of depreciation is used.
Owing to an unforeseen slump in market demand for rivets, the business decided to decrease its output of rivets, and switch to making other products rather. On 31 March 2007, one rivet-making machine was sold (on credit) to a buyer for Rs 8,000.
Later in the year, though, it was decided to abandon production of rivets together, and the second machine was sold on 01 December 2007 for Rs 2,500 cash.
problem 1: For the year ended 31 December 2007, make:
a) The machinery account.
b) The accumulated depreciation of machinery account.
c) The disposal of the machinery account.
problem 2: In what way do you think that the concept of consistency applies to the depreciation?
problem 3: As the computation of depreciation is based on estimates, not facts, why bother to make the computation? Describe.
problem 4: Give three reasons why depreciation might take place?
problem 5: Name the two depreciation methods.