Gary Gilmour began business on 1 January 20X1,with a 31 December balance date.All figures are GST-exclusive.
On that day he purchased a new factory machine for making canned soup for $42,000 from McWaters Ltd.
Freight of $900 and installation expenses of $1,100 were paid to get the machine into Gary's factory and ready for use.
Gary had to employ a repairman to get the machine operating correctly,as it was found to have been dropped accidentally by one of his employees on delivery,and needed a few things fixing and replaced as a result.The repairs and parts replaced cost $1,000.
The machinery has an estimated life of 20,000 hours.
The hours the machinery is estimated to be used annually are:
Year 1 2,000 hours
Year 2 2,500 hours
Year 3 3,000 hours
Year 4 4,500 hours
Year 5 4,000 hours
Gary also had a Nissan Maxima turbo vehicle,which he decided to register as a business vehicle,at a cost of $40,000 on 1 January 20X1.
a Show the appearance of the Fixed assets section of the Balance Sheet as at 31 December 20X5,assuming:
• actual usage equals estimated usage for the machine
• the units of use method is used
• the vehicle is depreciated at 20% diminishing value.
Round all amounts to the nearest whole dollar.Include any relevant subtotals.
b Show the appearance of the relevant section of the Income Statement for 31 December 20X5,assuming that:
• actual usage equals estimated usage
• Gary uses only one 'Operating expenses' section for all depreciation amounts
• other operating expenses are: Power $12,000,Materials $4,000,and Factory wages $45,000,which remain constant each year.
Include any relevant subtotals.
c Suppose Gary had the option of choosing the diminishing value method for the machinery depreciation at a rate of 20%,or straight line depreciation with an estimated residual value of $5,000 and a useful life of 10 years.Recalculate annual depreciation for years 20X1-20X5,and the accumulated depreciation as at the end of year 31/12/20X5.
d Assuming that any of the 3 depreciation methods (units of use,diminishing value,and straight line)as above are acceptable for tax purposes,state 1 advantage of using each of the 3 methods.

Question

Quizplus · Accepted Answer

The Answer is a
Machinery (42,000 + 900 + 1,100 + 1,000)/ 20,000 hours = $2.25 per hour
20X1 2,000 hours x 2.25 = $4,500
20X2 2,500 hours x 2.25 = $5,000
20X3 3,000 hours x 2.25 = $6,750
20X4 4,500 hours x 2.25 = $10,125
20X5 4,000 hours x 2.25 = $9,000
Accumulated depreciation $35,375
Vehicle
20X1 (40,000 - 0)x 20% = $8,000
20X2 (40,000 - 8,000)x 20% = $6,400
20X3 (40,000 - 14,400)x 20% = $5,120
20X4 (40,000 - 19,520)x 20% = $4,096
20X5 (40,000 - 23,616)x 20% = $3,277
Accumulated depreciation $26,893

a Machinery (42,000 + 900 + 1,100 + 1,000)/ 20,000 hours = $2.25 per hour 20X1 2,000 hours x 2.25 = $4,500 20X2 2,500 hours x 2.25 = $5,000 20X3 3,000 hours x 2.25 = $6,750 20X4 4,500 hours x 2.25 = $10,125 20X5 4,000 hours x 2.25 = $9,000 Accumulated depreciation $35,375 Vehicle 20X1 (40,000 - 0)x 20% = $8,000 20X2 (40,000 - 8,000)x 20% = $6,400 20X3 (40,000 - 14,400)x 20% = $5,120 20X4 (40,000 - 19,520)x 20% = $4,096 20X5 (40,000 - 23,616)x 20% = $3,277 Accumulated depreciation $26,893 b c Machinery - Diminishing value of 20% 31/12/20X1 (45,000 - 0)x 20% = $9,000 31/12/20X2 (45,000 - 9000)x 20% = $7,200 31/12/20X3 (45,000 - 16200)x 20% = $5,760 31/12/20X4 (45,000 - 21960)x 20% = $4,608 31/12/20X5 (45,000 - 26568)x 20% = $3,686 Accumulated depreciation $30,254 Machinery - Units of use 31/12/20X1 2,000 hours x 2.25 = $4,500 31/12/20X2 2,500 hours x 2.25 = $5,000 31/12/20X3 3,000 hours x 2.25 = $6,750 31/12/20X4 4,500 hours x 2.25 = $10,125 31/12/20X5 4,000 hours x 2.25 = $9,000 Accumulated depreciation $35,375 Machinery - Straight line of 10% ($5,000 residual value,useful life 10 years) 31/12/20X1 (45,000 - 5000)x 10% = $4,000 31/12/20X2 (45,000 - 5000)x 10% = $4,000 31/12/20X3 (45,000 - 5000)x 10% = $4,000 31/12/20X4 (45,000 - 5000)x 10% = $4,000 31/12/20X5 (45,000 - 5000)x 10% = $4,000 Accumulated depreciation $20,000 d The diminishing value method will give the lowest net profit,and therefore the lowest tax expense,in the early years of the asset's life. The units of use method will give a depreciation expense each year most closely related to the usage of the asset (and presumably the benefits of its use). The straight line method will give the highest net profit figures,as it will give the lowest depreciation expense each year;it is also the easiest to calculate.

b

c
Machinery - Diminishing value of 20%
31/12/20X1 (45,000 - 0)x 20% = $9,000
31/12/20X2 (45,000 - 9000)x 20% = $7,200
31/12/20X3 (45,000 - 16200)x 20% = $5,760
31/12/20X4 (45,000 - 21960)x 20% = $4,608
31/12/20X5 (45,000 - 26568)x 20% = $3,686
Accumulated depreciation $30,254
Machinery - Units of use
31/12/20X1 2,000 hours x 2.25 = $4,500
31/12/20X2 2,500 hours x 2.25 = $5,000
31/12/20X3 3,000 hours x 2.25 = $6,750
31/12/20X4 4,500 hours x 2.25 = $10,125
31/12/20X5 4,000 hours x 2.25 = $9,000
Accumulated depreciation $35,375
Machinery - Straight line of 10% ($5,000 residual value,useful life 10 years)
31/12/20X1 (45,000 - 5000)x 10% = $4,000
31/12/20X2 (45,000 - 5000)x 10% = $4,000
31/12/20X3 (45,000 - 5000)x 10% = $4,000
31/12/20X4 (45,000 - 5000)x 10% = $4,000
31/12/20X5 (45,000 - 5000)x 10% = $4,000
Accumulated depreciation $20,000
d The diminishing value method will give the lowest net profit,and therefore the lowest tax expense,in the early years of the asset's life.
The units of use method will give a depreciation expense each year most closely related to the usage of the asset (and presumably the benefits of its use).
The straight line method will give the highest net profit figures,as it will give the lowest depreciation expense each year;it is also the easiest to calculate.

Gary Gilmour Began Business on 1 January 20X1,with a 31