Depreciation of machinery
In early Jul) 2015. Masterton Ltd is considering the acquisition of some machinery for $1,200,000 plus GST to be used in the manufacture of a new product. The machinery has a useful life of 10 years, during which management plans to produce 500000 units of the new product. The residual value of the machinery is $100000.
The following projections were made in order to select a depreciation method to be used for the machinery:
| Year ended 30 June |
Units of output |
Repairs and maintenance |
Profit before depreciation |
| 2016 |
50 000 |
$70,000 |
$350,000 |
| 2017 |
45 000 |
60 000 |
340000 |
| 2018 |
55 000 |
90 000 |
355000 |
| 2019 |
58 000 |
95 000 |
360000 |
| 2020 |
60 000 |
100 000 |
380000 |
In calculating the profit before depreciation, all expenses have been deducted, including the repairs and maintenance expense.
Required
A. As the accountant for Masterson Ltd, prepare separate depreciation schedules for the machinery for the 5-year period, using the following depreciation methods: (a) straight-line, (b)diminishing balance, (c) sum-of-years'-digits, and (d) units-of-production. Use the following headings for each schedule: 'Year ending 30 June'. 'Annual depreciation expense', 'Accumulated depreciation', 'Carrying amount at end of year'.
B. Prepare a report for management, stating the advantages and disadvantages of each depreciation method. Include in the report your recommendations on the choice of method consistent with the requirements of JAS 16/AASB 116. Support your recommendations with schedules showing the total annual cost of operating the machinery, and the profit after depreciation.
C. Write an addendum to your report, making further recommendations based on the following additional information supplied to you by management. Firstly. as an alternative to acquiring the machinery, management is considering leasing the machinery for an annual rental charge of $250000; all repairs and maintenance costs would be paid by the lessor. Secondly, management wishes to show the most favourable financial results in anticipation of acquiring a long-term bank loan.
Assessment instructions:-
1) Write a summary of the Task and all its components using no more than 600 words. Please be advised we don't require you to answer this question rather marks would be awarded on how critically the question was analysed and summarized.
2) Power Point Slides are mandatory but no more than 4 slides.